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Unformatted text preview: Principles of Economics I
Economics 101 Announcements Readings: Chapter 5: jointly consumed goods Chapter 10: Production, Technology and Costs Chapter 16: Markets for Labor and other Factors of Production Discussion Sections this week New assignment available on Ctools later this evening Quiz this week More Interesting Production Functions Functions with multiple inputs
Capital Skilled and unskilled workers Human capital Land etc. Function is nonlinear E.g. Smith's pin factory Diminishing marginal returns to labor An example
Q = 100 L1/2 L 1 2 3 4 Q
100 141 173 200 MPL 100 41 32 27 Output 200 173 141 Q = 100 L 1/2 Slope = MPL 100 1 2 3 4 Labor Diminishing Marginal Product
We say that a production function displays diminishing marginal productivity in a factor (e.g. labor) if the marginal product of that factor falls as more of the factor is used Diminishing Marginal Product
output/ unit of L MPL L All other goods Diminishing Marginal Products
Lbread = 1 Lbread = 2 Lbread = 3 Lbread = 4 MPL1 MPL2 MPL3 MPL4 Bread How does the firm choose the amount of inputs it uses? Tradeoff: Cost of buying the marginal unit of input vs. The revenue generated by the extra output produced when employing the marginal unit of input Note: Assumed that firms care only about PROFITS Not sales volumes or market shares or share prices or revenues Example: Demand for Labor How much does the marginal unit of labor cost? Wage is the price of a unit of labor If the firm is a price taker in the labor market, then the cost of each additional uni...
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