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basic deffinitions aec 303_Page_8

basic deffinitions aec 303_Page_8 - Farmers o'rdinan'ly...

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Unformatted text preview: Farmers o'rdinan'ly would never use less input than the amount required to maximize the average value of the product (AVP, which is APP multiplied by the product price, p). Therefore AVP = pAPP. If the input price were higher than the maximum AVP level, the farmer cannot recover the full cost of expenditures on the input and would lose less by shutting down. Stage I of production starts at 0 units of input use and ends at the level of input use that where APP (and AVP) is maximum. A farmer would not ordinarily produce in Stage I. Stage II of production begins at the input level where APP (and AVP) is maximum and extends to the input level at which TPP is maximum and MPP (or MVP) is zero. Stage II of production includes the possible levels of input use that could potentially maximize profits for the farmer. Hence, Stage II is the rational stage of production where profit— maximizing farmers would ordinarily operate. Stage III begins at the input level where TPP is maximum (corresponding with the point where MPP and MVP are zero) and continues beyond. Ordinarily, farmers would never operate in Stage III of the production fimction. Stages can also be defined using production elasticities. In Stage I, the production elasticity is greater than one. In Stage III, the production elasticity is negative. In Stage II, (the rational stage), the production elasticity lies between zero and one. The series of equilibrium points where MVP = v for various levels of the input price (v) can be used to trace the demand curve for the input X in Stage II of production. This demand curve indicates how much input (x) the profit—maximizing farmer would be willing to purchase in order to maximize profits at any possible price level (v) for the input. ...
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