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# CH9new07 - Chapter 9 PRODUCTION Boiling Down Chapter 9 If...

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Chapter 9 PRODUCTION Boiling Down Chapter 9 If utility has been created for anyone, then production has occurred whether or not the inputs are tangible. The process of generating utility can be spelled out by observing the amount of output that is generated by various combinations of inputs. When all relevant combinations of inputs are related to output we have a production function which is usually described in general terms with the equation Q = F(K,L), where K and L are capital and labor inputs, respectively, and Q is the amount of output generated. The Q itself is not the utility created, but the value added to the raw materials that went into the creation process. Utility is then realized as the output is consumed. Production is divided into two time periods. The short run assumes that capital does not vary from day to day. Labor, can be applied to the fixed capital in varying amounts, creating an entire menu of possible output levels. The idea that one McDonald's hamburger restaurant could employ anywhere from 1 to 100 workers illustrates the short- run decision that a McDonald's manager has to face each week. How many workers to hire will depend on how output responds to differing work force sizes. Figure 9-1 below shows a standard short-run production function that might characterize a McDonald's restaurant for a given day. TP TP MP AP Labor Figure 9-1 Output grows rapidly when the first workers are given more help. As workers are added, the increase in output slows and eventually drops as the workers get in each other's way. The marginal product of labor (MP L ) is equal to the slope of the production function (MP L = change in TP/change in the labor force), and the average product of labor (AP L ) is measured by the slope of a ray from the origin of the production function to the point of total output relevant for the specified labor force (AP L = TP /total labor force).

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CHAPTER 9: Production Producing efficiently requires attention to the marginal and average production relationships. As long as the marginal product is greater than average product, adding an additional worker will increase the average product per worker so profit rises if wages stay constant. Consequently, an additional worker will be employed whenever the marginal product exceeds the average product. Employment will take place somewhere between the place where marginal product and average product are equal, and where marginal product is 0. On Figure 9-7 in your text the number of persons employed will be between 6 and 8. Later in the text you will see how the wage rate is actually determined, and then a more definitive statement can be made about how many laborers will be employed. Beyond all the graphics, jargon, and algebra, there is a theory building, which leads to the use of just the right mix of inputs in production. The correct production recipe leads to the least cost and the most competitive business operation. This will become clearer when production theory is related to cost in the next chapter.
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CH9new07 - Chapter 9 PRODUCTION Boiling Down Chapter 9 If...

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