chapter 8 and 9

chapter 8 and 9 - The Theory of the Firm 1 Production and...

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The Theory of the Firm 1
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2 Production and cost in the short run Business firm – an organization Owned and operated by private individuals Specializes in production Production Process of combining inputs to make goods and services Technology Method of combining inputs to produce goods or services
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3 The Production Function Indicates the maximum amount of output a firm can produce over some period of time from each combination of inputs Figure 1 The Firm’s Production Function Production Function Different Combinations of Inputs Different Quantities of Output Technical efficiency Achieved when maximum amount of output is produced with a given combination of inputs Economic efficiency Achieved when firm is producing a given output at the lowest possible total cost
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4 Short-Run versus Long-Run Decisions Long run A time horizon long enough for a firm to vary all of its inputs Variable inputs - can be adjusted up or down as the quantity of output changes Short run A time period during which at least one of the firm’s inputs is fixed Fixed inputs - cannot be adjusted as output changes in the short run
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Production in the short run 5
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6 Production in the Short-Run Total product Maximum quantity of output that can be produced from a given combination of inputs Marginal product of labor: MPL=ΔQ/ΔL Additional output produced when one more worker is hired
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7 Total and Marginal Product 30 90 130 160 184 196 Total Product Q from hiring fourth worker = 30 Q from hiring third worker = 40 Q from hiring second worker = 60 Q from hiring first worker = 30 increasing marginal returns diminishing marginal returns Units of Output Number of Workers 6 2 3 4 5 1 Figure 2 Total and Marginal Product
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8 Marginal Returns To Labor Increasing marginal returns to labor MPL increases as more labor is hired Diminishing marginal returns to labor MPL decreases as more labor is hired Law of Diminishing Marginal Returns As more and more of any input is added to a fixed amount of other inputs, its marginal product will eventually decline
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9 Total, Average, & Marginal Products of Labor, K = 2 Learn the three stages of production and learn which stage of production would a rational manager choose: Stage1: Stage 2: Stage 3:
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What is diminishing marginal returns and diminishing marginal product? Total product of labor: shows what happens to output when the firm changes one its inputs, holding all others constant Average product of labor: output per unit of labor Marginal product of labor is the additional output resulting from a one unit increase in labor, holding all other inputs constant. MP = Total product, marginal product and average product
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chapter 8 and 9 - The Theory of the Firm 1 Production and...

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