Ch. 8 Sec. 1 - chapter 8 Behind the Supply Curve: >...

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>> Behind the Supply Curve: Inputs and Costs Section 1: The Production Function chapter 8 A firm is an organization that produces goods or services for sale. To do this, it must transform inputs into output. The quantity of output a firm produces depends on the quantity of inputs; this relationship is known as the firm’s production function . As we’ll see, a firm’s production function underlies its cost curves . But as a first step, let’s look at the characteristics of a hypothetical production function. Inputs and Output To understand the concept of a production function, let’s consider a farm that we assume, for the sake of simplicity, produces only one output, wheat, and uses only two inputs, land and labor. This particular farm is owned by a couple named George and Martha. They hire workers to do the actual physical labor on the farm. Moreover, we will assume that all potential workers are of the same quality—they are all equal- ly knowledgeable and capable of performing farmwork. George and Martha’s farm sits on 10 acres of land; no more acres are available to them, and they are currently unable to either increase or decrease the size of their farm by selling, buying, or leasing acreage. Land here is what economists call A production function is the relationship between the quantity of inputs a firm uses and the quantity of out- put it produces.
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a fixed input —an input whose quantity is fixed and cannot be varied. On the other hand, George and Martha are free to decide how many workers to hire. The labor provided by these workers is called a variable input —an input whose quantity the firm can vary. (In Chapter 7, when we considered the example of Felix’s Lawn- Mowing Service, Felix’s fixed input was his lawn mower and his variable input was his own labor.) In reality, whether or not the quantity of an input is really fixed depends on the time horizon. In the long run —that is, given that a long enough period of time has elapsed—firms can adjust the quantity of any input. So there are no fixed inputs in the long run, only in the short run . Later in this chapter we’ll look more carefully at the distinction between the short run and the long run. But for now, we will restrict our attention to the short run and assume that at least one input is fixed. George and Martha know that the quantity of wheat they produce depends on the number of workers they hire. Given modern farming techniques, one worker can cul- tivate the 10-acre farm, albeit not very intensively. When an additional worker is added, the land is divided equally among all the workers: each worker has 5 acres to cultivate when 2 workers are employed, each cultivates 3 1 / 3 acres when 3 are employed, and so on. So as additional workers are employed, the 10 acres of land are cultivated more intensively and more bushels of wheat are produced. The relationship between the quantity of labor and the quantity of output, for a given amount of the fixed input, constitutes the farm’s production function. The production function for George and
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Ch. 8 Sec. 1 - chapter 8 Behind the Supply Curve: >...

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