Econ Ag Chapter 7 turn in homework by 5pm on B314 in Clark production function some level of output from input Inputs labor, fabric, supplies, etc y = function of x 1 etc marginal Physical product differences in TTP/ diff in X economists do not build these curves, we just use the numbers to create it, we don't generate the numbers we are concerned with the costs. we need to know this so that we can find out the profit short run vs long run short run = 1 imput that is fixed long run depreciation originally designed to be put into a escro account so that you have money to purchase another NEED TO KNOW FOR THE EXAM!! average variable cost total variable cost average fixed cost total fixed cost average total cost total cost what is the optimum sized plant too big equals not efficient marginal cost how much more is it going to cost to produce the next item change in total variable cost/ change in Q neighbor producing cheeper worst enemy Long run cost curvces are made up of lots of short run cost curves optimum point it the lowest point on the curve PAY ATTENTION TO THE PAGE WIT L ON IT long run average cost, long run average total cost curves first one
scale we talk about increasing at a certain factor (2x, 3x) larger I get, the cheaper it is to plant size very few of these examples second one as my numbers go up, costs go up where price and curve intersect, that is where we break even and can figure out how much profit we are making these are not economic contradiction RETURNS TO SCALE TEST? law of diminishing returns deals with playing with one imput returns to scale are playing with all! Isoquants X1 and X2 are varied and Y is constant typically the first graph, not the others, do know though so you can identify derived from production functions technical relationship, then you have to find the cost Iso cost line slope of the line is just the ratio between the two why do we need to know this? it came about from WWII linear programming from figuring out which supplies get to the right place that is where the computer came from this is big in the feeder industry to make money in the industry, have to feed a ration that has the least cost 3 mile island moving away from nuclear towards coal EXAM QUESTION! what would the output be at point A vs Point B vs Point C? Y is constant, or output is constant what is the difference between A and C? they demonstrate a higher level of output/production, the further they move to the NW, the greater the level of output ISO COST is your budget line this is the producers budget, similar to the consumer budget
how much your total budget is, then divide that by the of cost each unit, then you have your intercepts if X2 increases in cost, it will rotate outward (swing up) MRTS find your intercepts and where that line meets the curve, is the least cost combination. remember difference in replace input/ difference added input Price of added/ price of replaced two isoquants and two iso costs on pg 97 at the two intercepts, the marginal rate of substitution is equal to the Price of X2/ Pricex 1 if it was a perfect substitute, we would use either all of one or all of two curvature comes from them not being perfect substitutes underlying production philosophy underneath the cost of rations
Example we want to know which one is the cheapest one, we know that each of these will give us the same end product corn is being replaced and we are adding soybean oil meal figure out the cost of corn ($.05 * 125) find out the cost of each corn and soy bean meal, then find the total cost of the ration what is the cheapest to use
now looking at output to output relationships now we are holding X constant and varying Y know the graphs most common is the competing graph complementary as one increases, so does the other production what does alfalfa do to corn to make it a complementary graph nitrogen, alfalfa returns nitrogen to the soil so corn can grow. needs to have the nitrogen to replenish the soil go to the store and look at the label 10 10 0 Nitrogen Phosphorus Potassium sometimes will also include trace minerals they represent ratio convert it to a ton basis, it is a percentage basis
the other stuff is inert matter which do you buy? well, how much do you want to mow your lawn? How much water do you have? production function amount of fertilizer corresponds to how much you have to mow your lawn cost measure amount of fertilizer vs water, labor, etc example of supplementary beef vs wheet, after a certain point, they start competing with each other joint Need to remember, the point to consider the closest is the Price of the added/ price of the replaced
Case 2 Y2 1 2 3 4 5 6 7 8 43 42 40 36 30 22 12 0 Diff 1 2 4 6 8 10 12 Y1 0 7 13 18 22 25 27 28 Diff 7 6 5 4 3 2 1 MRSP 0.142857 0.333333 0.8 1.5 2.666667 5 12
we are maximizing revenue from two products (this is when it is two Ys)
Case 3 X2 1 2 3 4 5 2 3 4 7 10 1 1 3 3 X1 9 6 5 4 5 3 1 1 -1 3 1 0.333333 -0.33333 not this one
slope of isocost is 2/3 = .67 if we want to figure it out long hand, we can
X2 1 2 3 4 5 2 3 4 7 10 ind cost 6 9 12 21 30 X1 9 6 5 4 5 ind cost 18 12 10 8 10 total cost 24 21 22 29 40 Least cost cost per piece 2 3
we are minimizing costs from the use of two inputs (this is when it is two Xs)