Chapter 6 - Introductionto Productionand ResourceUse...

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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
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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
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Production Function Output = f( labor   |  capital,  land,  and management) Start with one variable input
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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…
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Coordinates of input and output on the TPP curve
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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
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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 
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Change in output as you increase inputs Output per unit input use
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Total Physical Product (TPP) Curve output input Marginal physical product is .45  as labor is increased from 16 to  20  Average physical product  is .31 if  labor use is 26
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Plotting the MPP and APP curves Plotting the MPP and APP curves Change in  output associated with  a change in inputs Change from point  A to point B on the  production function  is an MPP of 0.33 Level of output divided by the  level of input use Output divided by  labor use is equal to  0.19
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