Chs8,10,11 - Chapter 8 Summary: The cornerstone of...

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Chapter 8 Summary: The cornerstone of production theory is profit maximization. For a business to maximize profits, it must first minimize the cost of producing ech unit of output. Production: any activity that creates present and/or future utility. Inputs in Production In any production activity, there must be inputs that are either transformed or utilized in some way to produce an output. Inputs of production can be classified in three categories, land, labor and capital. A more important distinction is the difference in vixed and variable inputs. For certain production proceses over a set time interval, it is possible that certain inputs that contribute to production cannot be increased or decreased to change the level of output (fixed input). Variable inputs can be varied according to the desired level of output. Production with one variable input - Production Funcion A production function is a physical relationship between inputs and output. The relationship between a variable input and total physical product tends to follow a general trend: First it increases fairly rapidly, that is to say, as input increases, physical product increases at an increasing rate. However, past a certain point, the rate of increase of physical product slows down and then actually begins to decrease. * This phenomenon occurs because for the first x units of labor, people are doing more and more specialized work so total output increases (people have to focus on just one job and not worry about the other aspects - RANGE OF SPECIALIZATION ). However, after the first x units of labor, OVERCROWDING occurs where the area of operation cannot handle having so many laborers. Total Physical Product (TPP) = Output at any given variable input level Marginal Physical Product Marginal physical product of an input is defined as the additional output obtained by adding one more unit of the input holding all other inputs constant . MPP = Change in Output / Change in Input
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This note was uploaded on 07/14/2008 for the course ECON 73100 taught by Professor Klepper during the Fall '07 term at Carnegie Mellon.

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Chs8,10,11 - Chapter 8 Summary: The cornerstone of...

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