Chapter 5 The Firm And the Isoquant Map Chapter 5 The Firm And the Isoquant Map.
Chapter 5 The Firm Chapter 5 The Firm SHORT-RUN THEORY OF PRODUCTION Profits and the aims of the...
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Transcript of Chapter 5 The Firm Chapter 5 The Firm SHORT-RUN THEORY OF PRODUCTION Profits and the aims of the...
Chapter 5The Firm
Chapter 5The Firm
SHORT-RUN THEORY OF PRODUCTIONSHORT-RUN THEORY OF PRODUCTION
• Profits and the aims of the firm
• Profit maximisation
• Manager/Shareholder separation
• Manager/Worker Capture
• Capital Market => Profit maximisation
• Profits and the aims of the firm
• Profit maximisation
• Manager/Shareholder separation
• Manager/Worker Capture
• Capital Market => Profit maximisation
SHORT-RUN THEORY OF PRODUCTIONSHORT-RUN THEORY OF PRODUCTION
• So first objective:
• Produce as efficiently as possible
• What is maximum output per worker
• So first objective:
• Produce as efficiently as possible
• What is maximum output per worker
Wheat production per year from a particular farm (tonnes)Wheat production per year from a particular farm (tonnes)
Wheat production per year from a particular farm (tonnes)Wheat production per year from a particular farm (tonnes)
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Wheat production per year from a particular farmWheat production per year from a particular farm
Number of farm workers
To
nne
s o
f wh
eat
pro
du
ced
pe
r ye
ar
Number of workers
012345678
TPP 0 310243640424240
Wheat production per year from a particular farmWheat production per year from a particular farm
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Number of farm workers
To
nne
s o
f wh
eat
pro
du
ced
pe
r ye
ar TPP
TPP=Total Physical Product
• Next, we are interested in the Next, we are interested in the Marginal Marginal Physical ProductPhysical Product::
• This is the additional output gained as a This is the additional output gained as a result of employing one more worker (or result of employing one more worker (or unit of unit of LLabour or other inputs)abour or other inputs)
01
01
LL
TPPTPP
L
TPPMPP
Wheat production per year from a particular farm (tonnes)Wheat production per year from a particular farm (tonnes)
Wheat production per year from a particular farmWheat production per year from a particular farm
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Number of farm workers
To
nne
s o
f wh
eat
pro
du
ced
pe
r ye
ar TPP
MPP= TPP/ L = 7/1
TPP = 7
L = 1
And MPP = Slope of the TPP curve
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Wheat production per year from a particular farmWheat production per year from a particular farm
Number offarm workers (L)
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
Number offarm workers (L)
TPP = 7
L = 1
MPP = TPP / L = 7
0
10
20
30
40
0 1 2 3 4 5 6 7 8Number of
farm workers (L)
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
Number offarm workers (L)
TPP = 7
L = 1
MPP = TPP / L = 7
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
MPP
MPP = TPP / L
Number offarm workers (L)
Number offarm workers (L)
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
APP
MPP
b
Diminishing returnsset in here
Number offarm workers (L)
Number offarm workers (L)
b
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
APP
MPP
b
Maximum output occurs here
Number offarm workers (L)
Number offarm workers (L)
b
SHORT-RUN THEORY OF PRODUCTIONSHORT-RUN THEORY OF PRODUCTION
• Long-run and short-run production: – Here changing only one factor of production at a
time
• The law of diminishing returns
• Long-run and short-run production: – Here changing only one factor of production at a
time
• The law of diminishing returns
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
MPP
MPP = TPP / L
Number offarm workers (L)
Number offarm workers (L)
SHORT-RUN THEORY OF PRODUCTIONSHORT-RUN THEORY OF PRODUCTION
• Long-run and short-run production: – Here changing only one factor of production at a time
• The law of diminishing returns
• Fixed and variable factors
• Fixed Factors:– Factory
– Equipment
• Variable Factors:– Labour
– Raw materials, electricity etc
• Long-run and short-run production: – Here changing only one factor of production at a time
• The law of diminishing returns
• Fixed and variable factors
• Fixed Factors:– Factory
– Equipment
• Variable Factors:– Labour
– Raw materials, electricity etc
Average Physical ProductAverage Physical Product
• The next concept we are interested in is The next concept we are interested in is Average ProductAverage Product
• That is, the average output per worker That is, the average output per worker
• (per year)(per year)
L
TPPAPP
Wheat production per year from a particular farm (tonnes)Wheat production per year from a particular farm (tonnes)
• How would we represent the average on a How would we represent the average on a diagram?diagram?
L
TPPAPP
Average= Height of TPP/Length of L
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Wheat production per year from a particular farmWheat production per year from a particular farm
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
APP
MPP
b
b
d
d
Number offarm workers (L)
Number offarm workers (L)
Slope = TPP / L= APP
c
c
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Wheat production per year from a particular farmWheat production per year from a particular farm
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
APP
MPP
b
b
d
d
Number offarm workers (L)
Number offarm workers (L)
Slope = TPP / L= APP
c
c
Average rises and then falls
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Wheat production per year from a particular farmWheat production per year from a particular farm
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
APP
MPP
b
b
d
d
Number offarm workers (L)
Number offarm workers (L)
Slope = TPP / L= APP
c
c
How does the average
compare with the marginal?
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Wheat production per year from a particular farmWheat production per year from a particular farm
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
APP
MPP
b
b
d
d
Number offarm workers (L)
Number offarm workers (L)
Slope = TPP / L= APP
c
c
At point c the Marginal = Average
What about below c?
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Wheat production per year from a particular farmWheat production per year from a particular farm
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
APP
MPP
b
b
d
d
Number offarm workers (L)
Number offarm workers (L)
Slope = TPP / L= APP
c
c
What about above c?
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Wheat production per year from a particular farmWheat production per year from a particular farm
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
APP
MPP
b
b
d
d
Number offarm workers (L)
Number offarm workers (L)
Slope = TPP / L= APP
c
c
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Wheat production per year from a particular farmWheat production per year from a particular farm
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
APP
MPP
APP = TPP / L
Number offarm workers (L)
Number offarm workers (L)
Relationship between average and marginalRelationship between average and marginal
• If the If the marginalmarginal is is aboveabove the average, the average,
• The The average risesaverage rises
• If the If the marginalmarginal is is belowbelow the average, the average,
• The The average fallsaverage falls
• If the If the marginalmarginal is the is the samesame as the average, as the average,
• The The averageaverage stays the stays the samesame
Judge 1Score 9.3Average
Relationship between average and marginalRelationship between average and marginal
e.g. Ballroom Dancing Scores
Judge 1 2Score 9.3 9.1Average 9.2
Relationship between average and marginalRelationship between average and marginal
Ballroom Dancing Scores
Judge 1 2 3Score 9.3 9.1 9.4Average 9.2 9.266667
Relationship between average and marginalRelationship between average and marginal
Ballroom Dancing Scores
Judge 1 2 3 4Score 9.3 9.1 9.4 9.6Average 9.2 9.266667 9.35
Relationship between average and marginalRelationship between average and marginal
Ballroom Dancing Scores
Judge 1 2 3 4 5Score 9.3 9.1 9.4 9.6 9.1Average 9.2 9.266667 9.35 9.3
Relationship between average and marginalRelationship between average and marginal
Ballroom Dancing Scores
Game 1 2 3 4 5Score 25 14 6 28 44Average 19.5 15 18.25 23.4
Relationship between average and marginalRelationship between average and marginal
Cricket Averages
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Can see these rules in operation, here M> A, A UP Can see these rules in operation, here M> A, A UP etcetc
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
APP
MPP
APP = TPP / L
Number offarm workers (L)
Number offarm workers (L)
• TPP tells us about Production PossibilitiesTPP tells us about Production Possibilities
• And MPP tells us the effect of hiring more And MPP tells us the effect of hiring more workersworkers
• But need to translate production But need to translate production information into costs per unit of information into costs per unit of production.production.
• That way can compare cost of producing That way can compare cost of producing with revenue (price) from selling.with revenue (price) from selling.