Chapter 6 - Introduction to Production and Resource Use...

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Introduction to Production and Resource Use Chapter 6
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Topics of Discussion Conditions of perfect competition Classification of inputs Important production relationships (assume one variable input in this chapter) Assessing short run business costs Economics of short run decisions
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Conditions for Perfect Competition Homogeneous products No barriers to entry or exit Large number of sellers Perfect information Page 109
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Classification of Inputs Land: includes renewable (forests) and non- renewable (minerals) resources Labor: all owner and hired labor services, excluding management Capital: manufactured goods such as fuel, chemicals, tractors and buildings Management: production decisions designed to achieve specific economic goal Page 110
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Production Function Output = f( labor | capital, land, and management) Start with one variable input Page 112
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Production Function Output = f( labor | capital, land, and management) Start with one variable input assume all other inputs fixed at their current levels… Page 112
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Coordinates of input and output on the TPP curve Page 112
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Page 113 Total Physical Product (TPP) Curve Variable input
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Law of Diminishing Marginal Returns “As successive units of a variable input are added to a production process with the other inputs held constant, the marginal physical product (MPP) eventually declines Page 113
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Other Physical Relationships The following derivations of the TPP curve play An important role in decision-making: Marginal Physical = Output ÷ Input Product Pages 114-115
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Other Physical Relationships The following derivations of the TPP curve play An important role in decision-making: Marginal Physical = Output ÷ Input Product Average Physical = Output ÷ Input Product Pages 114-115
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Change in output as you increase inputs Page 112
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Page 113 Total Physical Product (TPP) Curve output input Marginal physical product is .45 as labor is increased from 16 to 20
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Page 112 Output per unit input use
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Page 113 Total Physical Product (TPP) Curve output input Average physical product is .31 if labor use is 26
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Plotting the MPP curve Plotting the MPP curve Page 114 Change in output associated with a change in inputs
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Marginal Physcial Product Marginal Physcial Product Page 114 Change from point A to point B on the production function is an MPP of 0.33
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Page 114 Plotting the APP Curve Plotting the APP Curve Level of output divided by the level of input use
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Page 114 Average Physical Product Average Physical Product Output divided by labor use is equal to 0.19
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Page 114 Three Stages of Production Three Stages of Production Average physical product (yield) is increasing in Stage I
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Page 114 Three Stages of Production Three Stages of Production Marginal physical product falls below the average physical product in Stage II
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Page 114 Three Stages of Production Three Stages of Production MPP goes negative as shown on Page 112…
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Page 114 Three Stages of Production Three Stages of Production Why are Stage I and Stage III irrational?
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This note was uploaded on 12/01/2010 for the course AGEC 105 taught by Professor Capps during the Summer '08 term at Texas A&M.

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Chapter 6 - Introduction to Production and Resource Use...

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