Page 102 - DECO101_MICRO_ECONOMICS_ENGLISH

Unit 7: Production Theory

Substituting the marginal product equations in the efficiency condition (MP /MP = P /P = Notes
L K L K
w/r) gives:
K 1/2
50
L 1/2 = w/r
L 1/2
50
K 1/2
Solving for K gives:
w
K= L
r
This expression is the equation for the expansion path for the production function Q = 100 K /
1/2
1/2
L . If w and r are known, equation K = w/r L defi nes the effi cient combination of capital and

labour for producing any rate of output e.g., the expansion path in the above figure. If w=1, and
r=1, the expansion path would be:
K = L
If w=2 and r=1, the equation for expansion path would be:
K=2L

If the expansion path is known, then knowing the isoquant-isocost system is not necessary to

determine efficient production points. The firm will only produce at those points on the expansion

path.
The expansion path indicates optimal input combinations, but it does not indicate the specifi c rate
of output associated with that rate of input use. The output rate is determined by substituting the
equation for the expansion path into the original production function.

Case Study Cotton Board over Estimated Production

he Southern India Mills’ Association (SIMA) said the Cotton Advisory Board (CAB’s)
has over estimated the production and under estimated the consumption. According
Tto industry experts any further export of cotton would surpass the quantity decided
by Group of Ministers by two lakh bales.

J Thulasidharan, chairman, SIMA said that CAB, at its first meeting held on January 6, 2011
has estimated the cotton production as 32.9 million bales and consumption as 27.5 million
bales (including 2 million bales of non-mill consumption), retained the exportable surplus
as 5.5 million bales and thus reducing the closing stock to 4.45 million bales as against the
Group of Ministers (GoM) promised quantity of 5 million bales.
He said, “CAB has over estimated the production and under estimated the consumption,
textile mills would be forced to curtail their production for want of raw cotton from July
onwards resulting abnormal increase in cotton and yarn price.” CAB has reported, cotton
production in the northern region (Punjab, Haryana and Rajasthan) will be less than 4
million bales, which has been endorsed by the ginning and trading community. In the
past several years, Maharashtra farmers have been selling sizable kapas in Gujarat to
fetch higher income whereas in the current season, since the farmers are realising good
prices in Maharashtra itself, trading of kapas to Gujarat has come down drastically. This
will result in Gujarat crop to less than 10 million bales, he said, Thulasidharan said, in
Contd...

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