Production and CostsProduction Function

Profit = Total revenue Total cost0What is the goal of business?We assume that the firms goal is to maximize profit.

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Profit = Total revenue Total cost0What is the goal of business?We assume that the firms goal is to maximize profit.

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The Production Function Production Function - Amount of outputs that can be produced with a given set of inputs

The Production Function Production Function - Amount of outputs that can be produced with a given set of inputsa.) Short run production

b.) Long run production

Most resources are fixed. To increase output a firm must increase the quantity of labor it employs

Everything is variable

Everything we will discuss will be short run production

Profit = Total revenue Total cost0Costs summary:__________________________Goods and Services producedTimeProduction summary:____________________Summarizing all the pieces of this general topic

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Profit = Total revenue Total cost0Costs summary:__________________________Goods and Services producedTimeProduction summary:____________________(TP) Total Product(MP) Marginal Product(AP) Average ProductEconomic Profit Accountant Profit Explicit Costs Implicit Costs

Short Run

1.)Fixed Costs2.)Variable CostsLong Run1.) All Variable(TC) Total Cost 1.) (TFC) Total Fixed cost 2.) (TVC) Total Variable cost(MC) Marginal Cost(AC) Average Cost 1.) (ATC) Average Total cost 2.) (AFC) Average Fixed cost 3.) (AVC) Average Variable cost1.)Depreciation2.) Normal Profit(MP or MPL) Marginal Product of Labor (DMR) Decreasing Marginal Returns(TR) Total Revenue(MR) Marginal Revenue(AR) Average Revenue

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Profit = Total revenue Total cost0Costs summary:__________________________Goods and Services producedTimeProduction summary:____________________(TP) Total Product(MP) Marginal Product(AP) Average Product(MP or MPL) Marginal Product of Labor (DMR) Decreasing Marginal ReturnsBut will just start with this part in this PPT

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(TP) Total Producto- is the total Q of a good produced in a given period.

-increases as the Q of labor employed increases until the point that reaches DMRMost resources are fixed. To increase output a firm must increase the quantity of labor it employs

Short Run Production

Points A through H on the curve correspondto the columns of the table.The TP curve is like the PPF: It separates attainable points and unattainable points.(TP) Total Product graph for a business producing bottled water

Points A through H on the curve correspondto the columns of the table.The TP curve is like the PPF: It separates attainable points and unattainable points.(TP) Total Product graph for a business producing bottled waterIts similar concepts to a PPC curve, but for an individual firm with inputs and outputs

oincrease in output from an additional unit of that input, holding all other inputs constant. (MP) Marginal Product Most resources are fixed. To increase output a firm must increase the quantity of labor it employs

Short Run Production(TP) Total Product

We can show marginal productas the orange bars that form steps along the total product curve.The height of each step represents marginal product.

Notice that the steeper the slope of the TP curve, the greater is MP marginal product.

Notice that the steeper the slope of the TP curve, the greater is MP marginal product.The slope of the TP curve is the MP curve!

o(MP) Marginal Product Most resources are fixed. To increase output a firm must increase the quantity of labor it employs

Short Run Production(TP) Total Product- change in (TP) that results from a one-unit increase in the quantity of labor employed. (MPL) Marginal Product of Labor

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(MPL) = 2(MPL) Marginal Product of Labor

(MPL) = 2(MPL) = 3(MPL) = 4(MPL) Marginal Product of Labor

(MPL) = 2(MPL) = 3(MPL) = 4(MPL) = 3(MPL) = 2(MPL) Marginal Product of Labor

Notice that the steeper the slope of the TP curve, the greater is MP marginal product.

o(MP) Marginal Product Short Run Production(TP) Total Product(MPL) Marginal Product of Labor Increasing Marginal ReturnsDecreasing Marginal Returns (DMR) Negative Marginal Returns- MP of an additional worker > MP of the previous worker.- MP of an additional worker < MP of the previous worker.- If you are doing this you are an idiot.

o(MP) Marginal Product Short Run Production(TP) Total Product(MPL) Marginal Product of Labor (DMR) Decreasing Marginal Returns- As a firm uses more of a variable input, with given fixed inputs, the MP of the variable input eventually decreases.

Law of Decreasing Returns

(MPL) = 1(MPL) = 2(MPL) = 4

Increasing Marginal Returns

(MPL) = 1(MPL) = 2(MPL) = 4(MPL) = 3(MPL) = 1(MPL) = 0

Increasing Marginal ReturnsDecreasing Marginal Returns (DMR)

(MPL) = 1(MPL) = 2(MPL) = 4(MPL) = 3(MPL) = 1(MPL) = 0(MPL) = -1

Increasing Marginal ReturnsDecreasing Marginal Returns (DMR) Negative Marginal Returns

Increasing marginal returns initially

Decreasing marginal returns eventually

Negative marginal returns

The total product (TP) and marginal product (MP) curves incorporate a feature of all production processes:

o(MP) Marginal Product Most resources are fixed. To increase output a firm must increase the quantity of labor it employs

Short Run Production(TP) Total Product(AP) Average Product_______TP # of workersis the total product per worker employed.

*** When marginal product exceedsaverage product, average product is increasing.Equation:

oMost resources are fixed. To increase output a firm must increase the quantity of labor it employs

Short Run Production( AP) Average Product When MP > AP, AP is increasing.(MP) Marginal ProductandWhen MP < AP, AP is decreasing.When MP = AP, AP is at its maximum.

When marginal product exceedsaverage product, average product is increasing.When marginal product is less than average product, average product is decreasing.When marginal product equalsaverage product, average product is at its maximum.

The grade point average versus marginal grade example (see slide 69) in the text is outstanding to use in class to describe how the marginal product and marginal cost curves relate to the average product and average cost curves. Once students can tell a story using the same intuition, they find drawing those curves much easier. While you have the curves drawn on the board or overhead, physically pull the average cost curves down (while marginal cost is below) or pull them up (when the marginal cost curve rises above). Use theatrics: raise your hands over your head and pull down the curves. If you have a more sports-oriented class, you can try using a batting average percentage and at-bat outcome example (if you had a .300 batting average and you struck out at your next at-bat [the marginal factor], your batting average is pulled down).

When marginal product exceedsaverage product, average product is increasing.When marginal product is less than average product, average product is decreasing.When marginal product equalsaverage product, average product is at its maximum.MP and AP go up together and go down together just at different rates because they are measuring different things

The grade point average versus marginal grade example (see slide 69) in the text is outstanding to use in class to describe how the marginal product and marginal cost curves relate to the average product and average cost curves. Once students can tell a story using the same intuition, they find drawing those curves much easier. While you have the curves drawn on the board or overhead, physically pull the average cost curves down (while marginal cost is below) or pull them up (when the marginal cost curve rises above). Use theatrics: raise your hands over your head and pull down the curves. If you have a more sports-oriented class, you can try using a batting average percentage and at-bat outcome example (if you had a .300 batting average and you struck out at your next at-bat [the marginal factor], your batting average is pulled down).

Zheng is a part-time student who takes one course each semester. Her grades areFirst semester: Calculus - C (2)Second semester: French - B (3)Third semester: Economics - A (4)Fourth semester: History - B (3)Fifth semester: English - C (2)Marginal and Average Values in YOUR LifeZhengs grade in each semester is her marginal grade, which increases from 2 to 3 to 4 and then decreases to 3 to 2.What is Zhengs average grade after each semester?An Example:

The red curve shows Zhengs marginal grade.The blue curve shows Zhengs average grade.When Zhengs marginal grade exceeds her average grade, the average rises.When Zhengs marginal grade is less than her average grade, the average falls.Marginal and Average Values in YOUR LifeAn Example:

So to summarize

Profit = Total revenue Total cost0Costs summary:__________________________Goods and Services producedTimeProduction summary:____________________(TP) Total Product(MP) Marginal Product(AP) Average Product(MP or MPL) Marginal Product of Labor (DMR) Decreasing Marginal ReturnsThis covers the production side

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Points A through H on the curve correspondto the columns of the table.The TP curve is like the PPF: It separates attainable points and unattainable points.(TP) Total Product graph for a business producing bottled waterIts similar concepts to a PPC curve, but for an individual firm with inputs and outputs

Start the experiment by defining that a day lasts for 1 minute. Get the class to keep time. On day 1, have 1 worker produce widgets. On day 2, have 2 workers, and so on. Youll probably run for 10 to 12 days before you get to almost zero marginal product. Record the inputs and outputs in a table on the board. Have some fun with quality control, shirking, and cheating. The auditor must ensure that old widgets and partly made widgets dont get used in a subsequent day. Each day must start clean. Now comes the assignment (Stage 1): Get the students to calculate marginal product and average product from the total product numbers that youre recorded on the board. Get them to make graphs of the total product, marginal product, and average product curves. Get them to describe the curves and to explain their similarities with and differences to the curves for smoothies in the textbook. The first assignment covers only production. If you want, you can extend the experiment with another assignment (Stage 2): Use the data from your widget production experiment. Tell the students the cost of the capi240 tal and the wage rate of a worker. (Make up the numbers. Any will do.) Tell the students to calculate total cost, marginal cost, and average cost. Get them to make graphs of the total cost, marginal cost, and average cost curves. Get them to describe the curves and to explain their similarities with and differences to the curves for smoothies in the textbook. This assignment and the previous one make an outstanding assignment for credit or extra credit.

We can show marginal productas the orange bars that form steps along the total product curve.The height of each step represents marginal product.

Notice that the steeper the slope of the TP curve, the greater is MP marginal product.The slope of the TP curve is the MP curve!

When marginal product exceedsaverage product, average product is increasing.When marginal product is less than average product, average product is decreasing.When marginal product equalsaverage product, average product is at its maximum.MP and AP go up together and go down together just at different rates because they are measuring different things

The grade point average versus marginal grade example (see slide 69) in the text is outstanding to use in class to describe how the marginal product and marginal cost curves relate to the average product and average cost curves. Once students can tell a story using the same intuition, they find drawing those curves much easier. While you have the curves drawn on the board or overhead, physically pull the average cost curves down (while marginal cost is below) or pull them up (when the marginal cost curve rises above). Use theatrics: raise your hands over your head and pull down the curves. If you have a more sports-oriented class, you can try using a batting average percentage and at-bat outcome example (if you had a .300 batting average and you struck out at your next at-bat [the marginal factor], your batting average is pulled down).

The endThank you

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The grade point average versus marginal grade example (see slide 69) in the text is outstanding to use in class to describe how the marginal product and marginal cost curves relate to the average product and average cost curves. Once students can tell a story using the same intuition, they find drawing those curves much easier. While you have the curves drawn on the board or overhead, physically pull the average cost curves down (while marginal cost is below) or pull them up (when the marginal cost curve rises above). Use theatrics: raise your hands over your head and pull down the curves. If you have a more sports-oriented class, you can try using a batting average percentage and at-bat outcome example (if you had a .300 batting average and you struck out at your next at-bat [the marginal factor], your batting average is pulled down). The grade point average versus marginal grade example (see slide 69) in the text is outstanding to use in class to describe how the marginal product and marginal cost curves relate to the average product and average cost curves. Once students can tell a story using the same intuition, they find drawing those curves much easier. While you have the curves drawn on the board or overhead, physically pull the average cost curves down (while marginal cost is below) or pull them up (when the marginal cost curve rises above). Use theatrics: raise your hands over your head and pull down the curves. If you have a more sports-oriented class, you can try using a batting average percentage and at-bat outcome example (if you had a .300 batting average and you struck out at your next at-bat [the marginal factor], your batting average is pulled down).

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Start the experiment by defining that a day lasts for 1 minute. Get the class to keep time. On day 1, have 1 worker produce widgets. On day 2, have 2 workers, and so on. Youll probably run for 10 to 12 days before you get to almost zero marginal product. Record the inputs and outputs in a table on the board. Have some fun with quality control, shirking, and cheating. The auditor must ensure that old widgets and partly made widgets dont get used in a subsequent day. Each day must start clean. Now comes the assignment (Stage 1): Get the students to calculate marginal product and average product from the total product numbers that youre recorded on the board. Get them to make graphs of the total product, marginal product, and average product curves. Get them to describe the curves and to explain their similarities with and differences to the curves for smoothies in the textbook. The first assignment covers only production. If you want, you can extend the experiment with another assignment (Stage 2): Use the data from your widget production experiment. Tell the students the cost of the capi240 tal and the wage rate of a worker. (Make up the numbers. Any will do.) Tell the students to calculate total cost, marginal cost, and average cost. Get them to make graphs of the total cost, marginal cost, and average cost curves. Get them to describe the curves and to explain their similarities with and differences to the curves for smoothies in the textbook. This assignment and the previous one make an outstanding assignment for credit or extra credit.

The grade point average versus marginal grade example (see slide 69) in the text is outstanding to use in class to describe how the marginal product and marginal cost curves relate to the average product and average cost curves. Once students can tell a story using the same intuition, they find drawing those curves much easier. While you have the curves drawn on the board or overhead, physically pull the average cost curves down (while marginal cost is below) or pull them up (when the marginal cost curve rises above). Use theatrics: raise your hands over your head and pull down the curves. If you have a more sports-oriented class, you can try using a batting average percentage and at-bat outcome example (if you had a .300 batting average and you struck out at your next at-bat [the marginal factor], your batting average is pulled down).