Production and Costs
Production Functions – tell us the maximum amount of output that a firm can produce using
different combinations of its two inputs, labor and capital.
The Long-Run v. the Short-Run
Production in the Short-Run
• Total Product (quantity/output) is the amount produced in a given time period.
•
Average Product of Labor is the total product divided by the total number of workers used
in the production
•
Marginal Product of Labor is the additional output produced due to hiring an additional
worker.
Activity
L
Q
MPL
APL
FC
VC
TC
AVC
ATC
MC
Law of diminishing marginal returns says that adding additional units of a variable input to a
fixed input will eventually lead to decreasing MP of the variable input
Relationship Between Marginal and Average Product
Costs
• Explicit Costs – a cost that involves spending money
• Implicit Costs – a nonmonetary opportunity cost
•
Total Cost is the cost of all inputs a firm uses in production
•
Total Fixed Cost is the cost that remains constant as output changes
•
Total Variable Cost is the cost that changes as output changes
•
Average Total Cost
•
Average Variable Cost
•
Average Fixed Cost
•
Marginal Cost is the change in total cost resulting from a one-unit change in output.
Example
Let’s assume that to make our bonbons, labor costs $20/day and the factory costs $100/day.
Fill in the cost columns on the previous chart.
After class, try graphing the cost curves below your chart.
Poll Everywhere
Relationship between Marginal and Average Cost
Costs in the Long-Run
Returns to Scale
• Increasing returns to scale occur when a firm’s LRATC is falling as it increases production
•
Decreasing returns to scale occur when a firm’s LRATC is rising as the firm increases
production
•
Constant returns to scale occur when the LRATC does not change as the firm increases
production