Matakuliah
Tahun
: F0882 - Economic Analysis
: 2009
PRODUCTION AND
BUSINESS ORGANIZATION
Chapter 1
Learning Outcomes
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Theory of Production and Marginal Products
Return To Scale
Short Run and Long Run
Technological Change
Business Organizations
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Theory of Production and
Marginal Products
BASIC CONCEPT :
1. The Production Function
The Production Function specifies the maximum output
that can be produced with a given quantity of inputs. It is
defined for a given state of engineering and technical
knowledge.
2. Total, Average, and Marginal Product
The marginal product of an input is the extra output
produced by 1 additional unit of that input while other
inputs are held constant.
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3. The Law of Diminishing Returns
The law of diminishing returns holds that we will get less
and less extra output when we add additional doses of
an input while holding other inputs fixed. In other words,
the marginal product of each unit of input will decline as
the amount of that input increases, holding all other
inputs constant.
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Marginal Product Is Derived
from Total Product
Diminishing Returns in Corn Production
RETURN TO SCALE
Three important cases should be distinguished :
• Constant returns to scale
• Increasing returns to scale (Economies of Scale)
• Decreasing returns to scale
Production shows increasing, decreasing, or constant
returns to scale when a balanced increase in all inputs
leads to a more-than-proportional, less-than-proportional,
or just-proportional increase in output.
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SHORT RUN AND LONG RUN
Efficient production requires time as well as conventional
inputs like labor. We therefore distinguish between two
different time periods in production and cost analysis.
The short run is the period of time in which only some
inputs, the variable inputs, can be adjusted. In the short
run, fixed factors, such as plant and equipment, cannot
be fully modified or adjusted.
The Long run is the period in which all factors employed by
the firm, including capital, can be changed.
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Chapter 6 Figure 6-3
Technological Change Shifts Production
Function Upward
Chapter 6 Figure 6-4
Value of Networking Increases as
Membership Rises
BUSINESS ORGANIZATIONS
1. The Nature of The Firm
Business firms are specialized organizations devoted to
managing the process of production. Production is
organized in firms because efficiency generally requires
large-scale production the raising of significant financial
resources and careful management and monitoring of
ongoing activities.
2. Big, Small and Infinitesimal Business
- The Individual Proprietorship
- The Partnership
- The Corporation
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