1. Academic Year: 2012/2013
Instructors: Brenda Lynch and PJ Hunt
Contact: brendalynch@ucc.ie p.hunt@ucc.ie

2. Production and Cost
Production Function is the relationship
between the maximum output attainable for
a given quantity of variable inputs (such as
capital and labour), for a given technology.

3. Average Product is total output divided by
the number of inputs (workers).
Marginal Product: is the additional
output generated from hiring 1 additional
worker.
Total Product: The total output produced
by a firm in a given period of time.

4. The Stages of Production.
Stage 1: Average product rising. Total
Product is rising. Marginal product is
beginning to turn.
Stage 2: Average product declining,
marginal product positive but is declining
while total product reaches its peak.
Stage 3: Marginal product is negative,
average product is declining and total
product is declining.

5. Stage 1 Stage 2 Stage 3
Ep > 1 Ep < 1 Ep < 0
Total Point of maximum Ep = 0 TP
Output marginal returns Ep = 1
Q (Units)
Increasing Returns Decreasing Returns Negative Returns
X1 X2 X3 Inputs
Avg. Output,
Marginal
Output,
(units of
output per
unit of input
AP
X1 X2 X3 Inputs
MP

6. Production Elasticity.
When MPL > APL, labour elasticity EL > 1
When MPL < APL, labour elasticity EL < 1

7. Law of diminishing marginal returns;
As a firm uses more of a variable input, with
a given quantity of fixed input, the marginal
output of the variable input eventually
diminishes.
Technical and Economic Efficiency.
All points on a production function are said
to be technically efficient. However
economic efficiency occurs only at one
point, at the output level where MR = MC.

8. Do the following functions exhibit increasing,
decreasing or constant returns to scale?
Q = 3L + 2K
This function exhibits constant returns to
scale. For example if L = 2 and K = 2, Q =
10. If L = 4 and K = 4 then Q = 20. Hence
when input is doubled output is doubled.

9. Q = (2L + 2K) ½ (to the power of a half)
The function exhibits decreasing returns
to scale. For example when L = 2 and K = 2
then Q = 2.8. If L= 4 and K = 4 then Q = 4.
Hence when inputs are doubled output is
less than double.

10. Q = (3LK)²
 This function exhibits increasing returns
to scale. For example if L = 2 and K = 2 then
Q = 144. If L= 4 and K = 4 then Q = 2,304.
When inputs are doubled output will more
than double.