Ec100A Ch6 - 6 PRODUCTION Econ 100A Mortimer Production The...

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PRODUCTION 6 Econ 100A Mortimer
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Production The Production Decisions of a Firm The theory of the firm describes how a firm makes cost- minimizing production decisions and how the firm’s resulting cost varies with its output. The production decisions of firms are analogous to the purchasing decisions of consumers, and can likewise be understood in three steps: 1. Production Technology 2. Cost Constraints 3. Input Choices Econ 100A Mortimer
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THE TECHNOLOGY OF PRODUCTION The Production Function factors of production Inputs into the production process (e.g., labor, capital, and materials). ( , ) q F K L Inputs and outputs are flows (e.g., per year – we often focus on amounts of labor, capital, and output and ignore time). The above equation applies to a given technology. Production functions describe what is technically feasible when the firm operates efficiently . production function Function showing the highest output that a firm can produce for every specified combination of inputs. Econ 100A Mortimer q L q=F(L) Not feasible Technically efficient Technically inefficient
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THE TECHNOLOGY OF PRODUCTION The Short Run versus the Long Run short run Period of time in which quantities of one or more production factors cannot be changed. (e.g., labor may be variable but not a plant or machinery) fixed input Production factor that cannot be varied. long run Amount of time needed to make all production inputs variable. Econ 100A Mortimer
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PRODUCTION WITH ONE VARIABLE INPUT (LABOR) TABLE 6.1 Production with One Variable Input 0 10 0 1 10 10 10 10 2 10 30 15 20 3 10 60 20 30 4 10 80 20 20 5 10 95 19 15 6 10 108 18 13 7 10 112 16 4 8 10 112 14 0 9 10 108 12 4 10 10 100 10 8 Total Output ( q ) Amount of Labor ( L ) Amount of Capital ( K ) Marginal Product (∆ q/ L ) Average Product ( q/L ) Econ 100A Mortimer Assume capital is fixed but labor is variable Determined by given technology Adding labor is counterpr oductive
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PRODUCTION WITH ONE VARIABLE INPUT (LABOR) Average and Marginal Products average product Output per unit of a particular input. marginal product Additional output produced as an input is increased by one unit. Average product of labor (AP L ) = Output/labor input = q/L Marginal product of labor (MP L ) = Change in output/change in labor input= Δq/ΔL Econ 100A Mortimer
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PRODUCTION WITH ONE VARIABLE INPUT (LABOR) Relationship between TP and MP Relationship between TP and AP The total product curve in (a) shows the output produced for different amounts of labor input. The average and marginal products in (b) can be obtained from the total product curve. MP L = the slope of the total product curve. (MP L > 0 up to L=8) AP L = the slope of the ray from the origin to the corresponding point on the total product curve At point A in ( a), MP L is 20 because the slope of the total product curve is 20. At point B in (
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This note was uploaded on 04/24/2009 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at University of California, Berkeley.

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Ec100A Ch6 - 6 PRODUCTION Econ 100A Mortimer Production The...

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