242Htopic6 - Topic 6: The Cost of Production A fixed input...

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Topic 6: The Cost of Production A fixed input is an input whose quantity can’t be changed. A variable input is an input whose quantity can be changed. In the short run , some inputs are fixed and some inputs are variable. In the long run , all inputs are variable. Adam Smith in The Wealth of Nations(1776) wrote of a factory which made pins. He claimed that labor's marginal physical product would be increasing due to specialization. As more people (laborers) are added to production, each can specialize on a smaller part of the pin production process. With many workers, a firm will be able to take advantage of each worker's specific talents by letting them do what they are best at. By each worker doing only one specific task, tasks will be simplified and work will become less stressful. Tasks will be easier to learn and master. Consider the production function for pins given below where P is output of pins, T is tools used in the production process and L is laborers: P = F(L,T) = TL 2 . The following table shows the total product, average product, and marginal product from various combinations of labor and tools. Labor Tools Total Product Average Product Marginal Product 1 1 2 1 3 1 4 1 5 1 Specialization is occurring when the marginal product is increasing. This can be seen graphically by plotting the total product, average product, and marginal product curves. Output Total Product 25 5 Labor Input
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Average Product, Marginal Product Marginal Product Average Product 5 3 3 Labor Input Notice that when marginal product is rising, average product is rising. Similarly, when marginal product is falling, average product is falling. For example, suppose MTSU’s football team gives up 50 points to Illinois and 50 points to Florida for an average of 50 points per game. Then, MTSU holds Murry State to 20 points. Consequently, the average becomes 40. Or, suppose your first test score is 80 and your second test score is 80 for an average of 80. Then, you score a 50 on the third test, which lowers your average to 70. Thomas Malthus, a nineteenth century British economist, believed the population of the world would be able to produce just enough to subsist or survive in the long run. Malthus believed land (a necessary input in production) to be forever fixed. In Principles of Political Economy (1820), Malthus explains that as the population of the world grows, more and more laborers will be added to the production process, but the marginal physical product of these workers will be diminishing. In fact, Malthus predicted that the population of the world would grow until the marginal physical product of the last worker was just enough to produce an average physical product which would place everyone just at the brink of starvation. Thus, the decline in the productivity of additional labor would eventually lead to near famine, at which point the world's population size would stop growing and reach equilibrium. Consider the following production function where L equals labor,
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242Htopic6 - Topic 6: The Cost of Production A fixed input...

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