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Chapter 6

# 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
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
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
Coordinates of input and output on the TPP curve Page 112

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Page 113 Total Physical Product (TPP) Curve Variable input
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
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
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
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
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
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
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…
Page 114 Three Stages of Production Three Stages of Production Why are Stage I and Stage III irrational?

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

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