welcome back to our discussion on production and cost which we started uh with the previous
lecture and we have already discussed about uh explicit cost implicit cost economic profit
etc . and we said that profit is equal to revenue minus cost and this is obviously economic
profit and this is equal to p multiplied by q and this is uh economic cost so this is
economic cost so in this module we we will try to understand where does this q come from
how do we determine q how much output will be produced uh how is that determined and
basically production production of any output like in the previous example we used the example
of mangoes mangoes getting produced so uh how much quantity of mango will be produced
will be dependent on or will be a function of lot of inputs it is a function of amount
of say raw material used uh number of seeds used uh amount of pesticide used fertilizer
used etc which is which will be probably the raw material people working in the land people
working on the uh land so labour then the the land itself the amount of land that is
there available to grow the mangoes so we can call that the capital and if any machine
is used to whatever machine equipments used in the that that will be included in capital
and raw materials etc so these are the kinds of inputs which are
going to produce the output so output is basically a function of lot of inputs now from here
the producer has to decide how much output he would like to produce and before that he
needs to know he he should know that a certain amount of labour a certain amount of capital
a certain amount of materials together is going to give me a certain amount of output
so this knowledge is essential for a person to start production in the first place so
this is called the production function so this is not uh the the how i explained it
is not a definition of production function but this is how production how what we understand
by production function . so production function shows the relationship
between the quantities of inputs required to produce a quantity of output and uh so
this is this is our production function from here and before i go on to another technical
term called the marginal product marginal product is basically marginal products is
about any input say marginal product of labour so marginal product of any input is the increase
in output resulting from an additional unit of that input keeping all the inputs constant
so that is the marginal product of labour but before i go on to marginal product let
me explain the concepts of production function marginal product of labour etc through a very
simple example . lets take the example of a tailoring shop
lets take the example a very simple example of a tailoring shop where basically there
is a land say there is a uh land of rather than land say there is a room there is a tailoring
shop which is basically a room of 200 square feet area and there are 2 sewing machines
there are 2 sewing machines in that uh shop so the shop the what is the so what is the
the what so the room itself and the sewing machines they would be inputs in the production
of garments in the tailoring shop so there is a room of say 200 square feet area
area and say the so this is one input so these are the inputs
so there is a room and this input has a so every input has a cost so when we wrote the
production function in the first place q is the function of all these inputs every input
has a cost and that is the that cost is what is of concern right so uh so room is 200 square
feet area and it has a rent of say Rs 500 okay so whatever like this is a flat amount
of 500 that per week or month or whatever he is paying
secondly there are 2 sewing machines so there are 2 sewing machines and sewing machines
uh either they have been bought say for example someone has borrowed the money to buy the
sewing machine or so so basically you can imagine that the for the sewing machine he
has to pay say rupees 500 say its 250 per sewing machine that he has pay to whoever
he has uh bought the machine from or borrowed the money to buy the machines from so this
these are the cost now even before he buys purchases any cloth
to produce garments a tailor or a person who decides to start the tailoring shop he is
incurring these costs he is incurring these costs now now imagine he has engaged one person
now he hires a tailor or he hires a person okay he hires one person he hires one person
and say he pays him rupees 100 per day so he pays him rupees 100 per day and he hires
this person who is going to stitch clothes for him he is going to stitch garments for
him and so these are his inputs and when this person comes he starts so lets ignore about
the lets not talk about the the cloth etc so imagine everything is included here or
so so this person is getting a uh amount of rupees 100 per day and he is able to stitch
so now we are talking about q next is we are talking about q so this person
is able to stitch one garment per day so when the person starts of with a shop he has to
incur the cost of this entire 200 square feet area of room for rupees 500 he has to pay
for the 2 sewing machines and then he hires a person and he gets to uh gets the output
of one garment per day so since there is only one person there is no way that uh he can
increase the number of garments so the only way he can increase his output is by hiring
more people so he can do this by hiring more people .
so now in the same room with the same amount of sewing machines lets say so now he has
a fixed input of land plus sewing machine are his inputs which are fixed he cannot change
that even if he does not produce any garments he is having to pay for this these so say
for example he is paying 1000 rupees for these so lets not talk about this part right now
so number of people he is hiring is say first person he is able to stitch 1 garment then
he hires one more person and as soon as there are 2 people there say due to whatever reason
say the output increases to 3 say for example this person really you know like sharing of
knowledge two people are there they are talking so they he feels more motivated and they produce
more clothes its not that 2 people are there 2 2 garments are getting stitched so there
is may be sharing of knowledge or whatever so little more number of garments are getting
stitched here now say for example he hires 3 people so then
we see that the number of garments that are getting stitched is 6 so although there are
2 sewing machines now maybe there is some division of labour so 2 people are stitching
on the sewing machines and the third person is helping with the say buttons some amount
of thread work this that so so basically the productivity increases and there is more amount
of output getting produced here then he increases the number of people that
he hires here to 4 and number of garments getting stitched is 8 then say for example
so similarly he increases 5 6 7 8 and the for the fifth person that he hires his number
of garments increases by only one unit so there is only additional unit that is getting
stitched when he hires the 6th person he sees that the number of garments that is getting
produced is not increasing its still the same he is able to produce still 9 units of garments
and if he hires the 7th person he actually produces 8 garments 8 garments so why am i
uh why am i giving the example in such a way that what is the reason behind output getting
stagnated after certain amount of input addition and later actually decreasing what is the
reason behind that or what is the intuition behind that
the intuition is uh usually what happens is remember that the the area of the room is
still still constant it is still 200 square feet and the number of sewing machines to
work on that is also same that is only there are only 2 sewing machines so now if you keep
on increasing the amount of clothes or number of people who can work there they will be
working with only 2 machines and in that land in that amount of space only
so they will probably not be able to increase the output any further and on the contrary
it may quite happen that since the room is getting uh very crowded that there are too
many people and as they say that too many uh cooks spoil the broth so similarly too
many tailors are probably creating a mess over here and why the output is actually falling
so this is very highly possible so this is a very uh possible outcome which the producers
are quite aware of and uh they know that the production just by increasing the amount of
input there is only a limit to which you can increase the output and beyond that you have
to increase the other inputs as well if you want to keep on increasing the output
so in this situation now if at this stage if the person decides the producer decides
that i am going to increase the space of the of my shop or better still i am going to add
one more sewing machine then again probably his output is again going to grow much more
than this so uh but since he is not doing this so what we see is the additional output
that the labour the input called labour is able to add or the that is able to contribute
keeps on after a point of time it keeps on decreasing
so initially it keeps on increasing as there is lot of uh fixed fixed capital or fixed
uh machineries to work with and gradually it gets saturated and later after a point
of time the amount of output additional output that is produced it keeps on declining so
this is what happens . so then we are going to so then what is marginal
product that we are talking about so marginal product is mp of any marginal product of any
input diminishes as more and more units of the input are added keeping other inputs constant
so here coming back to this example then what is the marginal product of any input so what
is the marginal product of the first input so the first input that is added here 1 unit
of labour is been added and what is the increase in output 2
now here again 1 unit of labour added increased out is 3 so basically marginal product of
labour is here marginal product of labour is 2 here it is marginal product of sorry
let me write it neatly so from here to here marginal product of labour is 2 from here
to here it is 3 from here to here it again falls to 2 from here to here it is 1 here
to here it is 0 and here to here it is actually minus 1
so this is how marginal product keeps on initially it increases but then it keeps on diminishing
so this is called the diminishing marginal product so this is called the diminishing
marginal product and so diminishing marginal product is the marginal product of an input
declines as the quantity of the input increases other things equal so mp is very important
to the producer in deciding if he should add an additional input for production
so so you can very well figure out from here that a person who is deciding how many units
of labour to hire to uh produce the amount of output he is going to look at the marginal
product he is going to basically think at the margin
he is a rational person and he is going to think at the margin and he is going to see
that here if i produce initially if i hire 1 person here if i hire this person here i
am getting 2 additional number of garments if i hire 1 more person i get 3 if i hire
yet 1 more person i get a little less but still it is positive still there is increase
in the amount of output so this is what he is going to consider so before i move on to
talking about costs or uh talking uh talking about his decision making process let me also
draw the diagram what it looks like . so what does the production function basically
look like so the the production function basically looks like here is the number of units of
labour he is basically deciding the producer is deciding whether to hire one more person
or not so say 1 2 so here is the output that he is getting out of every uh additional hiring
so for the first person he gets 1 unit for the second person he gets 3 units for the
third person he gets sorry let me extend it so third person he gets 6 units and then 8
9 9 so person for person 8 then 9 then again 9 and then declining so basically his production
function basically looks like this so production function looks like this and what does the
marginal product look like now so this is the production function and
what is the marginal product firstly the marginal product is the slope of this curve at every
point so this is the slope of the curve at different points and we are going to see that
the slope actually initially increases and then becomes constant and then decreases so
this is the slope of the curve and if we plot the slope of the curve we are going to see
that it basically looks like this so this is marginal product of labour where you have
labour on the x axis and marginal product of labour which is basically units of output
in units of output so marginal product of labour curve looks like this
so coming back to the slides coming back to the slides what we were discussing we said
why why is marginal product important why are we so uh concerned about uh trying to
understand what marginal product of labour is and the reason that we are uh we are interested
in this is because the producer while hiring the people what he has to make a tradeoff
here so what is he doing here so basically
now every person that he hires and say its a fixed amount of he is paying an amount of
100 rupees per person so every person that he hires he is having to incur a cost of first
one 100 second one 200 third person he has hired 300 400 so he is having to incur these
costs and for every person that he hires he is getting a margin additional output of these
units so obviously while hiring he is going to say
see if i hire the next person this is the amount of cost additional cost that i have
to incur which is rupees 100 in this case and the additional revenue that i can hope
to get by hiring this person is basically this additional amount that is getting produced
multiplied by the price so this is the tradeoff that he looks at
he knows that if i hire one more person i am go going to get some additional output
out of him which is the marginal product of labour at that point but i have to incur an
additional cost of hiring this person which is the wage that i am paying to this person
so if the amount of output gives me a revenue which is higher than the cost i am having
to incur by hiring this person i am going to hire this person
but if my uh production or if my revenue falls below that i may not like to hire this person
the reason i said i may not like to hire because there are other costs involved other decisions
involved we are going to uh look at the output choice of a producer later when we actually
do the market structures but right now it suffices to know that marginal product is
definitely important to understand because the producer makes his choices at the margin
and he is going to look at his uh benefit and cost at the margin that is additional
benefit he gets by uh producing an additional unit of output from uh hiring another person
and the cost that he has to incur so this is why mp is important to the producer
in deciding if he should add an additional input for production now if he hires an additional
labour his cost rises by the wage he pays to the labour and his output rises by marginal
productivity of labour and this is why it is important to understand
in the next module of this lecture we are going to look at cost curves and we are going
to see it will be basically a continuation of this discussion and we will be able to
see what the cost curves look like and we are also going to talk about the fixed cost
which we have not spoken about in this module we are going to talk about those also thank
you