Chapter 6

# Chapter 6 - Introductionto Productionand ResourceUse...

• Notes
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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

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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
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…
Coordinates of input and output on the TPP curve

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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

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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
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
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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• Spring '08
• Capps
• Physical Product, average profit

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