Introduction to Agricultural and
Natural Resources
Introduction to Production and
Resource Use
FREC 150
Dr. Steven E. Hastings
Introduction to Production and
Resource Use
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This Outline Covers the First part of Chapter 6 in Penson et al.
Major Topics
Production Decisions
Types of Resources
The Production Function – TPP, AVP and MPP
Impact of Technology
Value Relationships
Firm’s Demand for an Input
An Application of Eqi-marginal Return
Summary
Important Concepts
• Production Decisions
– Important Concepts:
• Production – the process of transforming resources into
goods and services (again, soil to corn flakes)
• Resources - inputs (land, management, capital, etc.)
• Goods and Services – provide satisfaction to consumers
– Important Questions:
• What to produce? How to produce? How much to
produce?
• Types of Resources (Inputs)
– Many ways to distinguish resources.
• By type: land, labor, capital and management.
• Fixed and Variable – this distinction is based on the concept of the
producer’s planning horizon, which varies by producer and/or
good or service.
• A “fixed input” can not be changed in the short-run.
• A “variable input” can be changed in the short run.
• In the “long-run” all inputs are variable.
• The Production Function
– A “model” that represents the “physical” relationship between inputs
(fixed and variable) and output.
– Mathematically – Y=f(X1 / X2, X3…Xn held constant)
– Verbally – Y is the maximum amount of a good that can be produced
with increasing amounts of X1 holding all other inputs, X2, X3…Xn,
constant – given a state of technology.
– Graphically – see Table 6-1 and Figure 6-1
The Production Function
• Product Curves
– Total Physical Product (TPP)
– Average Physical Product (APP) = TPP/X1
– Marginal Physical Product (MPP) =
•  TPP /  X1
• In a “normal shaped” production function, MPP captures the “Law
of Diminishing Marginal Productivity” – as additional amounts of a
variable input are added to a set of fixed inputs, the MPP will
increase, reach a maximum, and then decrease.
• Mathematically, MPP is the slope (rise over run) of the TPP.
– Stages of Production (I, II and III) – the APP and MPP allows us to start
to “narrow in” on the optimum amount for the producer to produce.
• Stage I - APP is increasing (efficiency is increasing) and MPP > APP
(getting more from an additional unit than the average unit).
Irrational to produce in this area: can increase net revenue by
moving to Stage II.
• Stage II - APP > MPP and MPP is positive. Rational area to
produce in.
• Stage III - MPP is negative. An additional input reduces TPP.
Irrational to produce in this area.
Stages of Production
FREC 150 – Economics of
Agricultural and Natural
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Effect of New Technology
– New technology “shifts” the production function in a variety of
ways. See Figures 3-2 and 3-3 (old book).
– Typically, allows producer to get more output per unit of input
over at least some range of production.
– Examples:
• the assembly line for car production (1908)
• new seed varieties – The Green Revolution (1945)
• new pesticides and herbicides
• “robotic welders”
Impact of New Technology
• Value Relationships
– Physical values (bushels of corn, for example), allow you to identify a range of
possible optimal input levels – Stage II.
– To identify the exact amount, need to convert the output (bushel of corn) to
dollar value of the output (the value of a bushel of corn).
– This is done by scaling (or multiplying) TPP, APP and MPP by the price of a
bushel of corn – what a bushel of corn can be sold for in the market.
– This converts
• TPP to Total Value Product or TVP.
• APP to Average Value Product or AVP, and
• MPP to Marginal Value Product or MVP.
– TVP, AVP and MVP are Dollar Values ($$)
• See Table 6-5 and Figure 6-6.
• For graphing purposes, the vertical axis is now in Dollars.
Value Relationships
Correction: 5 is 3 – 4
In Table 6-5.
• Most Useful Concept
– Marginal Value Product (MVP) - the amount added to "revenue" when
an additional unit of the variable input is used.
– MVP = TVP / X1= change in the value of output / unit change in
input or
– = MPPinput * Poutput
• One Final Thing – The Cost of the Input
– Marginal Factor Cost (MFC or MIC) measures the addition to total cost
of an additional unit of an input.
– MFCinput is equal the market price of the input.
• Optimum Amount of a Variable Input to Use
– Then optimum amount of a variable input is being used when:
• MVPinput = MFCinput
– The cumulative net benefit (the total revenue over the total cost of
using the variable input ) is maximized!
– See Table 6-5.
• A Firm’s Demand for a Variable Input
– It is the quantity of an input the firm would buy at alternative prices.
– Specifically, the firm's demand curve for an input is the MVP curve
(within Stage II of production), ceteris paribus.
– The firm's demand for an input is a derived demand. That is, it is
derived from the demand for the output produced by the input.
– Factors that cause the demand for an input to change are:
• Change in demand (and price ) of the output
• Change in the productivity of the input
• Change in the price of other inputs (substitutes and complements)
Firm’s Demand for an Input
An Application of the MVP Concept
• Use of a Resource to Benefit Society
– The fixed amount (1 million gallons) of water in a reservoir can be
used to irrigate corn on a nearby farm or as a coolant in a nearby
plant that makes X’s (any product).
– You are hired by “society” and put in charge of allocating the
water?
• How should the water be allocated between the two uses?
Information Needed
• If water used to grow corn -
• If water used to make X’s -
Flip the Right Graph!
$
$
Water to Farm
Water to Plant
What is the optimum allocation? Why?
Principle of Equi-marginal Returns
– Principle of Equi-marginal Returns – a scarce resource should be
allocated between alternative uses so that the marginal returns (in
this case, MVP’s) are equal in the alternative uses.
– What if local environmentalists want to keep the water in place for
aesthetic purposes? What about fisher-men, -women?
– What are the implications for how society should allocate scarce
resources?
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Land?
Water?
Forests?
Cars?
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TVs?
Food?
Introduction to Production and
Resource Use
• Summary
– The combination of physical and value (dollar) relationships between
inputs and output allows us to make fundamental decisions regarding
resource use and allocation in our economic system.
• Lecture Sources: Text and Miscellaneous Materials