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Microeconomics 26 Friday, November 3, 2006

# Microeconomics 26 Friday, November 3, 2006 - A measure of...

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Friday, November 03, 2006 Microeconomics PRODUCTION PRODUCTION is process of turning inputs into outputs INPUTS PRODUCTION OUTPUTS PROCESS Ex. RESTAURANT INPUTS Building (A) Ovens-equipment (B) MEALS = Q Food Supplies (C) Workers (D) PRODUCTION FUNCTION is a mathematical description of the production process Q = f (A,B,C,D) LONG RUN vs. SHORT RUN SHORT RUN is a period of time short enough that at least one input is fixed LONG RUN is a period of time long enough that all inputs are “variable” Our analysis will focus on Production in the short run o Some input will be fixed Ex. SMALL FIRM THAT MAKES SWEATERS Q = f (L; K) Sweaters Labor Machines (fixed) (capital) (after the “;” then it is fixed) Suppose the firm has signed a lease to rent 1 machine

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Friday, November 03, 2006 Q or Total Average Product Marginal Product L Product of Labor (TPL) of Labor (APL) of Labor (MPL) 0 0 --- --- 1 4 4 4 2 10 5 6 3 13 4.3 3 4 15 3.75 2 5 16 3.2 1 AVERAGE PRODUCT OF LABOR (APL) = TPL/L
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Unformatted text preview: A measure of output per worker MARGINAL PRODUCT OF LABOR (MPL) is additional output produced when on additional worker is hired. MPL = ∆TPL/∆L ∆L = always 1 # of Sweaters 16 TPL 14 12 10 SLOPE = MPL = ∆TPL/∆L 8 6 Point of Diminishing Returns (Inflection Point) 4 2 1 2 3 4 5 # of workers • Output is an increasing function of labor • Initially output is increasing at an increasing rate = MPL increasing initially • At some point, output begins to increase at a decreasing rate = MPL starts to decrease DIMINISHING MARGINAL PRODUCT OR DIMINISHING RETURNS As more of a variable input is hired, holding all other inputs fixed the additional output from each additional worker will eventually decline Friday, November 03, 2006 # of Sweaters 16 14 12 10 8 6 4 2 1 2 3 4 5 # of workers MPL APL 6 5 4 3 APL 2 1 MPL 1 2 3 4 5 # of workers...
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