Chapter 7 - Production Inputs and Cost

Chapter 7 - Production Inputs and Cost - Chapter 7...

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Chapter 7 Production, Inputs, and Cost: Building Blocks for Supply Analysis Of course, that’s only an estimate. The actual cost will be higher. AUTO MECHANI C TO CUSTOMER
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Historical costs for long-distance telephone transmissions Figure 1 2
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Short-Run vs. Long-Run Costs Run Period of time Short run Some cost commitments – not ended Predetermined Plant size Most input quantities 3
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Short-Run vs. Long-Run Costs Long run All cost commitments – ended Adjustable Plant size Inputs 4
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Short-Run vs. Long-Run Costs Fixed cost Quantity of input Doesn’t vary with output Cost of input Doesn’t vary with output Variable cost Varies with output 5
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Short run Only one variable input Total physical product (TPP) Total amount of output From a given quantity of input 6
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Total physical product schedule for Al’s building company Table 1 7 (1) (2) Number of Carpenters Total Product (Garages per Year) 0 1 2 3 4 5 6 0 4 12 24 32 35 30
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TPP Total physical product with different quantities of carpenters used by Al’s firm Figure 2 8 1 2 3 0 4 5 Quantity of Carpenters per Year 6 7 5 10 Total Output in Garages per Year 40 15 20 25 30 35 32 G F E D C B A
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Average physical product (APP) Total physical product (TPP) Divided by quantity of input (X) APP=TPP/X Marginal physical product (MPP) Increase in total output From: one-unit increase in input All other inputs constant 9
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Al’s product schedules: total, average, and marginal physical product and marginal revenue product Table 2 10 (1) (2) (3) (4) (5) Number of Carpenters Total Physical Product (Garages per year) Marginal Physical Product (Garages per added carpenter) Marginal Revenue Product (Thousands of $ per year per added carpenter) Average Physical Product (Garages per year) 0 1 2 3 4 5 6 0 4 12 24 32 35 30 0 4 6 8 8 7 5 4 8 12 8 3 -5 $60 120 180 120 45 -75
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MPP curve Rate of change: TPP curve Equals slope of TPP curve Increasing marginal returns MPP – increases TPP – increases Increasing rate 11
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Diminishing marginal returns MPP – decreases; positive TPP – increases Decreasing rate Negative marginal returns MPP – negative TPP – decreases 12
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Al’s marginal physical product (MPP) curve Figure 3 13 -6 -2 MPP in Garages per Year 10 12 2 4 6 0 8 -4 14 1 2 3 0 4 5 Number of Carpenters 6 7 MPP Increasing marginal returns Diminishing marginal returns Negative marginal returns
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“Law” of diminishing marginal returns
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Chapter 7 - Production Inputs and Cost - Chapter 7...

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