prodnotes - Notes: Production Functions Basicallly we begin...

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Notes: Production Functions Basicallly we begin with a simple production relationship: Q = f(N) where Q = Output and N = Input How are Q and N realted? Let’s use L = labor input to keep things simple. Do you expect Q to increase as L increases? In other words, if more workers are hired, do you expect output to increase? The relationsip between Q and L is usually direct, or positive. That is… If L increases then Q increases If L decreases then Q decreases. But the exact relationship may have 3 theoretical, functional relationships… Three Theoretical Production Functions A. Linear -- demonstrates constant marginal returns, that is, as additional units of input are added to the production process each additional unit of input adds an equal amount to the number of units of output/product produced. ex . Let L = number of units of input AP = TP/L Q = number of units of product/output MP = D TP/ D L L TP MP AP 0 0 Q 10 1 10 10 10 slope constant 2 20 10 º TP 10 10 3 30 10 10 1 4 40 10 10 MP = AP 10 L 5 50 10 0 1 Note: The slope of the TP is the MP.
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2 B. Increasing -- demonstrates increasing marginal returns, that is, as additional units of
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prodnotes - Notes: Production Functions Basicallly we begin...

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