Ch06_Pindyckfinal

Ch06_Pindyckfinal - Chapter 6 Production Introduction...

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Chapter 6 Production
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Chapter 6 2 Introduction Production decisions of a firm are similar to consumer decisions 1. Production Technology Describe how inputs can be transformed into outputs 2. Cost Constraints Firms must consider prices of labor, capital and other inputs and minimize total production costs.
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Chapter 6 3 Production Decisions of a Firm 1. Input Choices Given input prices and production technology, the firm must choose how much of each input to use in producing output We can represent the firm’s production technology in the form of a production function
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Chapter 6 4 The Technology of Production The production function for two inputs: q = F(K,L) Output ( q ) is a function of capital (K) and labor (L) The production function is true for a given technology If technology increases, more output can be produced for a given level of inputs Shows what is technically feasible when the firm operates efficiently
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Chapter 6 5 The Technology of Production Short Run Period of time in which quantities of one or more production factors cannot be changed These inputs are called fixed inputs Long Run Amount of time needed to make all production inputs variable Short run and long run are not time specific
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Chapter 6 6 Production: One Variable Input We will begin looking at the short run when only one input can be varied We assume capital is fixed and labor is variable Output can only be increased by increasing labor Must know how output changes as the amount of labor is changed (Table 6.1)
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Chapter 6 7 Production: One Variable Input
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Chapter 6 8 Production: One Variable Input Average product of Labor: measures the productivity of a firm’s labor in terms of how much, on average, each worker can produce L q = = Input Labor Output AP L
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Chapter 6 9 Production: One Variable Input Marginal Product of Labor – additional output produced when labor increases by one unit Change in output divided by the change in labor L q = = Input Labor Output MP L
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Chapter 6 10 Production: One Variable Input
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Chapter 6 11 At point D, output is maximized. Labor per Month Output per Month 0 2 3 4 5 6 7 8 9 10 1 Total Product 60 112 A B C D Production: One Variable Input
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Chapter 6 12 Average Product Production: One Variable Input 10 20 Output per Worker 30 8 0 2 3 4 5 6 7 9 10 1 Labor per Month E Marginal Product •At 8 units, MP is zero and output is at max
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Chapter 6 13 Product Curves We can show a geometric relationship between the total product and the average and marginal product curves Slope of line from origin to any point on the total product curve is the average product At point B, AP = 60/3 = 20 which is the same as the slope of the line from the origin to point B on the total product curve
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14 Product Curves 10 30 q/L
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This document was uploaded on 11/29/2009.

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Ch06_Pindyckfinal - Chapter 6 Production Introduction...

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