Policonomics » LPsection » Production I: Economic region of production

Production I: Economic region of production

Summary

In this first LP on production, we examine the decisions that lead to optimal levels of production. This is crucial, as it mirrors the same decisions that we saw consumers making: assigning our limited (and expensive!) resources in the best way possible in order to maintain optimal levels of production.

Production and cost:

Production duality:

The economic region of production shows the combinations of factors at a certain cost that make economic sense. Areas outside the economic region of production mean that at least one of the inputs has negative marginal productivity. This region is marked by what are called ridge lines, which are simply the boundaries beyond which one of the two factors is being overused. Therefore, outside the economic region of production, there is clear inefficiency, and the company would be better off using less of one of the two factors, bringing costs down whilst maintaining equal production output. Graphically:

Video – Economic region of production:

In order to analyse these production possibilities, let’s have a look at production functions and their main characteristics.

Production I: Marginal rate of technical substitution Production I: Production function