EC201_L07 - Econ 201 - Principles of Microeconomics 1...

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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 1-unit 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 1-unit 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 8-3 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 4.00-1 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 profit-maximizing 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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This note was uploaded on 04/27/2008 for the course ECON 201 taught by Professor Wadell during the Spring '08 term at University of Oregon.

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EC201_L07 - Econ 201 - Principles of Microeconomics 1...

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