Scribd
Upload
65 views

Week 09 Production in

The short run is defined as a period of time where at least one input, like capital, is fixed. A production function relates the maximum output possible from given inputs like labor and capital. It shows three stages of production: average product initially rises then falls, and marginal product becomes negative. The relationships between productivity and cost curves are that marginal cost is a mirror image of marginal product, and average variable cost mirrors average product.

Uploaded by

Theo Dayo
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
65 views

Week 09 Production in

The short run is defined as a period of time where at least one input, like capital, is fixed. A production function relates the maximum output possible from given inputs like labor and capital. It shows three stages of production: average product initially rises then falls, and marginal product becomes negative. The relationships between productivity and cost curves are that marginal cost is a mirror image of marginal product, and average variable cost mirrors average product.

Uploaded by

Theo Dayo
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 14

Production (in the short run)

Production is the creation of any good or service that


has value to either consumers or other producers.

A production function is a statement of the functional


relationship between inputs and output. It shows the
maximum output that can be produced from given
inputs.
The production function shows only efficient production
processes because it gives the maximum output.

Production function: Q = f( L, K)

Production function for a firm that uses only labor and


capital.
Q units of output (widgets) are produced using L units of
labor services (hours of work by assembly-line workers) and
K units of capital.
Production Functions, Time and Variability of
Inputs
Short run: a period of time where at least one factor of
production cannot be varied. Inputs can be fixed or
variable.
Long run: period of time that all relevant inputs can be
varied. Inputs are all variables.
Very long run: period of time in which the technological
possibilities available to a firm can be changed.
The short-run is a period in which at least one input is fixed. In the
context of a production process with only capital and labor as inputs,
we assume that capital is fixed and labor is variable.

L TPL APL MPL


0 0 0
1 20 20
2 50 25
3 90 30
4 120 30
5 140 28
6 150 25
7 155 22
8 150 19
Total Product (Q): The total output of a particular good or
service produced by a firm.

Average Product (Q/L): The total output produced per unit


of a resource employed (total output divided by the quantity
of a resource employed).
Marginal Product: The additional output produced when
one additional unit of labor is employed, holding other
factors constant.

MPL= ∆Q/∆L or (TPL)n – (TPL)n-1


The total, average and marginal curves are geometrically
related.

Average and Total Product Curves

APL = TPL divided by L


Graphically, to find APL at any point on the TPL curve, draw a
ray from the origin to that point and find the slope of that ray.

Therefore APL is maximum when a ray from the origin is


tangent to the TPL curve.
Marginal and Total Product Curves

MPL measures the change in TPL resulting from the employment of


one additional unit of labor.
MPL = DTPL/DL or DQ/DL
It is the slope of the TPL curve at any point. (Recall the slope at
any point on a curve is given by the slope of a tangent to that
point).

If MP > 0 TP is rising as L increases.


If MP = 0 TP is maximum.
If MP < 0 TP is falling as L increases.
Average and Marginal Product Curves

The point on the TPL curve where MPL reaches its maximum is
known as an inflection point. It denotes the point where TPL
stops increasing at an increasing rate and starts to increase at
a decreasing rate. The inflection point denotes the onset of
diminishing returns.

Whenever the marginal is greater than the average, the


average is rising; whenever the marginal is less than the
average, the average is falling.
The Law of Diminishing Returns:

If a firm keeps increasing an input, holding all other inputs


and technology constant, the corresponding increases in
output will eventually become smaller (diminish).

This law comes from realizing most observed production


functions have this property.

If only one input is increased, the marginal product of that


input will diminish eventually.
The three Stages of Production
Stage I: Range of output over which Average Product is
rising
MP > 0, AP rising, MP> AP

Stage II: Range of output from Max Average Product to


where MP = 0
MP> 0, AP falling, MP < AP

Stage III: Range of output over which Marginal Product is


negative
The relationship between Productivity Curves and Cost
Curves
The marginal cost (MC) and average variable cost curves
(AVC) are mirror images of the marginal product (MP) and
average product (AP) curves respectively.
Hence, when MP is rising, MC is falling.
When MP is falling, MC is rising.
When MP reaches its max, MC is min.
A similar relationship holds between the AP and AVC curves.
Assumptions: Labor is the only input and Wage is given.
Wage L TCL MCL
$15 4 $60 Wage = DTC / DL
$15 5 $75
MC = DTC / DQ
$15 6 $90
$15 7 $105 MPL = DQ / DL
$15 8 $120
MC * MPL = (DTC / DQ) *(DQ / DL)

∴ MC * MPL = DTC / DL = Wage


"
∴ MC =
MPL

You might also like