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Unformatted text preview: Econ 201  Principles of Microeconomics 1 Production and Profit Our discussion: 1. Inputs and outputs 2. Factor demand 3. Property rights and private ownership 4. Game theory 1. Input/Output and MP Inputs (or factors of production) include anything that in any way contributes to production. The production function denotes the relationship between inputs and output. y = f ( L , K ), where ‘ L’ and ‘ K’ are inputs. Econ 201  Principles of Microeconomics 2 Total product (TP) is the amount of output obtained in total from a given quantity of input. TP = f (Input) Output Input Marginal product (MP) is the increase in the total product (TP) that results from a 1unit increase in an input, holding the amounts of all other inputs constant. MP L or MP K Average product (AP) is the total product (TP) divided by the quantity of an input. AP L or AP K The relationship between total and marginal products. 11 5 2 3 TP = f (Input) Output Input 63 60 7 8 MP 3 = 6 MP 8 = 3 Econ 201  Principles of Microeconomics 2 Total product (TP) is the amount of output obtained in total from a given quantity of input. TP = f (Input) Output Input Marginal product (MP) is the increase in the total product (TP) that results from a 1unit increase in an input, holding the amounts of all other inputs constant. MP L or MP K Average product (AP) is the total product (TP) divided by the quantity of an input. AP L or AP K The relationship between total and marginal products. 11 5 2 3 TP = f (Input) Output Input 63 60 7 8 MP 3 = 6 MP 8 = 3 Econ 201  Principles of Microeconomics 3 11 5 2 3 TP = f (Input) Output Input 63 60 7 8 Input 3 MP 6 83 MP The “Law” of diminishing marginal product: as more of one factor of production is used with a fixed quantity of other factors, the marginal product (MP) of the expanding factor ultimately decreases. MP L is eventually decreasing in L . MP K is eventually decreasing in K . Input MP MP IMP DMP NMP IMP: Increasing marginal product DMP: Decreasing marginal product NMP: Negative marginal product Econ 201  Principles of Microeconomics 4 35 11 3.60 36 10 1 9 2 35 8 33 7 5.00 6 26 5 6 4 7 3 8 2 3 1 AP MP TP Inputs 3 3.00 5 4.00 15 21 5.00 5.25 5 5.20 30 4 3 4.71 4.38 36 4.001 3.18 How many units of an input (e.g. labour) will a firm hire? It depends on what the firm wants to do. Assumption : The firm’s objective is to maximize profits… Profit = TR  TC How many units of an input will a profit maximizing firm hire? 2. Factor demand From earlier… “A consumer is always made better off by purchasing an additional unit of a good if the marginal value of the next unit exceeds the price she would be required to pay for that unit.” Similarly, in choosing how much of an input to hire, a profitmaximizing firm should compare the marginal contribution of the input to the cost of hiring the input. Econ 201  Principles of Microeconomics...
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 Spring '08
 wadell
 Economics, Game Theory, MPK

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