Marginal Analysis

Front 1

the physical act of transforming raw materials into finished products

Back 1

Production-

Front 2

the relationship between the flow of quantities of various inputs employed in the production process such as capital equipment, labor, energy and raw materials, and the flow of quantity of outputs such as lumber that can be produced from them. Both the inputs and the output are measured as flows or quantities per unit time (per day, per week, per month, per year, etc.) because most production processes are not ‘one time only’ but continuous operations.

Back 2

Production function -

Front 3

Types of production functions

Back 3

Linear

Quadratic

Cobb-Douglas

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Categories of inputs

Back 4

Fixed

Variable

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– those inputs whose quantities cannot be changed during the period of time under consideration i.e. in a sawmill building, the quantity and kind of saws, the storage facilties and the top management cannot be changed immediately.

Back 5

Fixed

Front 6

- those inputs whose quantities can be changed within the relevant period. For example, the amount of raw materials such as saw logs in a sawmill can be changed within a short period of time (daily, weekly) and the amount of electricity used can be changed at will at a short notice.

Back 6

Variable

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Period of production

Back 7

Short run period

Long run period

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the time period in which some of the firm’s inputs are fixed, that is, in which it does not have an opportunity to change their quantities.

Back 8

Short run period of production –

Front 9

the period of time in which quantities of all inputs can be changed.

Back 9

Long run period-

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States that as the variable input increased by total amount, other inputs held constant, the additional output due to the additional unit of input decreases beyond a certain point.

Back 10

The Law of Diminishing Returns

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Marginal Principle

Back 11

Involves the comparison of the additional gain with the additional cost

Has universal application

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smallest diameter of sawlog that will be brought out of the forest. The higher the price, the smaller will be the marginal sawlog because the high price can cover the cost of transporting small logs.

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Marginal sawlog size -

Front 13

smallest diameter of pulpwood that will be brought out of the forest

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Marginal pulpwood size -

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Marginal Property

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1. For sawmill operator, marginal property is one that returns just enough after conversion to lumber to cover costs of acquisition, logging, transport, milling, seasoning and sale.

2. For timber grower, consider all factors affecting timber growth

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For sawmill operator, marginal property is one that returns just enough after conversion to lumber to cover costs of acquisition, logging, transport, milling, seasoning and sale.

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•For timber of a given species, size and quality growing in area with little change in topography, distance may be the limiting factor

•Compare changing costs over distance with change in revenue

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For timber grower, consider all factors affecting timber growth

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•effect of site-soil productivity

•effect of transport cost- generally land value decreases as distance from the mill site increases

•availability of navigable river, ease of access

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Input-input case

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Isoquant

Isocost

Least cost combination Expansion path –

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Characteristics of isoquanta.

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Downward sloping

Convex to the origin

Non-intersecting

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a curve that shows combinations of inputs that will yield the same level of output.

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Isoquant

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the 2 inputs are substitutable up to a certain degreeb.

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Downward sloping

Front 21

due to the decreasing marginal rate of technical substitution (MRTS). MRTS is the slope of the isoquant

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Convex to the origin-

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- a line that shows the combinations of 2 inputs that a firm can afford given its cost outlay and the prices of the 2 inputs

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Isocost

Front 23

the point of tangency between the isoquant and the isocost.

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Least cost combination -

Front 24

shows the combinations of 2 inputs that firm should choose if its cost outlay changes , while the prices of inputs remain the same .

Back 24

Expansion path –

Front 25

Output-output case

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Product Transformation Curve

Isorevenue line

Best output mix

Joint Production

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Characteristics of PTC

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a. Downward sloping

b. Concave

c. Marginal rate of of transformation is increasing

d. Explained by the specialization of resources

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- shows the maximum combinations of 2 outputs that the firm can produce given its available resources

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Product Transformation Curve (PTC)

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- If the firm wants to increase output Y₁ it has to give up some units of output Y₂ because resources are limited

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Downward sloping

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as Y₁ is increased by a constant amount, Y₂ has to be decreased by increasing quantities

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Concave

Front 30

shows combinations of 2 outputs that will give the firm the same level of revenue given the prices of outputs

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Isorevenue line –

Front 31

the point of tangency between the PTC and the isorevenue line.

Back 31

Best output mix -

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means the production of 2 or more products using the same production facility

Back 32

Joint Production –

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It gives the best combination of two outputs that a firm can produce given the prices of outputs.

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Best output mix -

Front 34

This will give the firm the highest revenue.

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Best output mix -

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This pool of knowledge is called .

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technology

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It is not possible for a single combination of inputs to produce two different maximum output levels

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Non intersecting

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It connects the different least cost combinations of the firm for different cost outlays.

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Expansion path

Front 38

It shows the optimum level of input combination meaning the various possible quantities of the two factors which can be purchased with a given outlay of money.

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Least cost combination

Front 39

generally land value decreases as distance from the mill site increases

Back 39

effect of transport cost-

Front 40

Distinction between fixed and variable inputs is vased on time period under consideration

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Period of production