Micro Eco (Cost Chap-8)1

8/8/2019 Micro Eco (Cost Chap-8)1

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Costs

Chapter 8-1

(my version of it)


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Laugher Curve

A woman hears from her doctor that she

has only half a year to live.

The doctor advises her to marry aneconomist and to move to South Dakota.


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Laugher Curve

Will this cure my illness? she asked.

No, but the half year will seem pretty

long.


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Introduction

In the supply process, people first offer

their factors of production to the market.

Then the factors are transformed by firmsinto goods that consumers want.

Production is the name given to that

transformation of factors into goods.


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The Role of the Firm

The firm is an economic institution that

transforms factors of production into

consumer goods it:

Organizes factors of production.

Produces goods and services.

Sells produced goods and services.


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Virtual firms subcontract out all work. More and more of the organizational structure

of business is being separated from the

business.

The Role of the Firm

A virtualfirm only organizes production.

Notintheb

ookbutsom

ethingtoth

inkabout!


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The Firm and the Market

Firms are the production organizations

that translate factors of production into

consumer goods.


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Production Tables and

Production Functions Aproduction table shows the output

resulting from various combinations of

factors of production or inputs.


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Production Functions Marginal productis the additional output

that will be forthcoming from an additional

worker, other inputs remaining constant.


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Production Functions Average productis calculated by dividing

total output by the quantity of the output.

Not in the text but an important conceptimportant concept to understand Average Cost later!


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Production Functions Production function a curve that

describes the relationship between the

inputs (factors of production) and outputs.


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Production Functions The production function tells the maximum

amount of output that can be derived from

a given number of inputs.


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A Production Table

Number ofworkers

Total outputMarginalproduct

Averageproduct

46

7653

10

25

1234

5

6789

10

0 455.75.85.6

5.24.6

4.03.32.5

410172328

3132

323025

0


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Output

3230282624222018161412108

6420

1 2 3 4 5 6 7 8 9 10Number of workers

TP

Outputperwork

er

1 2 3 4 5 6 7 8 9 10

Number of workers

7

6

5

4

3

2

1

0

MP

(a) Total product (b) Marginal and average product

AP

A Production Function


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The Law of Diminishing

Marginal Productivity Both marginal and average productivities

initially increase, but eventually they both

decrease.


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Marginal Productivity This means that initially the production

function exhibits increasing marginal

productivity.

Then it exhibits diminishing marginal

productivity.

Finally, it exhibits negative marginalproductivity.

Not in your bookNot in your book

Not in your bookNot in your book

This is in your book!This is in your book!


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Marginal Productivity The most relevant part of the production

function is that part exhibiting diminishing

marginal productivity.


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Marginal Productivity Law of diminishing marginal

productivity as more and more of a

variable input is added to an existing

fixed input, after some point the additionaloutput one gets from the additional input

will fall.

Fixed input


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Marginal Productivity

Number ofworkers

Totaloutput

Marginalproduct

Averageproduct

Increasingmarginal returns

Diminishingmarginal returns

Diminishingabsolute returns

46

765310

25

1234

5

6789

10

045

5.75.85.6

5.24.6

4.03.32.5

4

10

172328

3132

323025

0


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Output

Diminishing

marginalreturns

Diminishing

absolutereturns

3230282624

222018161412108

6420

1 2 3 4 5 6 7 8 9 10

Increasing

marginal

returns

Number of workers

TP

Outputp

erwork

er

1 2 3 4 5 6 7 8 9 10

Number of workers

7

6

5

4

3

2

1

0

MP

Diminishing

marginalreturns

Diminishing

absolutereturns

(a) Total product (b) Marginal and average product

AP


Marginal Productivity


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Marginal Productivity This law is also called the flower pot law.

If it did not hold true, the worlds entirefood supply could be grown in a single

flower pot.

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Micro Eco (Cost Chap-8)1