CH_05_B - CHAPTER 5 (CONT.) THE BUSINESS ENTERPRISE: THEORY...

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C HAPTER 5 (C ONT .) THE BUSINESS ENTERPRISE: THEORY OF THE FIRM II. Production in the Short Run 1. Fixed and Variable Resources Variable resources : Can be varied quickly to change the output rate. Fixed resources : Variations in these resources take time. Short run : At least one resource is fixed. Long run : No resource is fixed, all resources can vary. 2. Production function : The relationship between the amount of resources employed and total product or output. The firm’s production function for a particular good, q ) , ( L K q q = shows the maximum amount of the good that can be produced using alternative combinations of capital ( K ) and labor ( L ). Example: 3. Marginal product of an input: The additional output that can be produced by employing one more unit of that input while holding all other inputs constant. Mathematically, L q MP labor of product inal M K q MP capital of product inal M L K = = = = arg arg Increasing Marginal Returns : As marginal product increases, the firm can experience increasing marginal returns because additional workers can specialize and make more efficient use of the fixed resources. Diminishing Marginal Returns: When more and more of a variable resource is added to a given amount of a fixed resource, the resulting change in output will eventually diminish and could turn negative. Mathematically, 0 0 2 2 2 2 < = < = L q L MP K q K MP L K Example: 1

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4 Chapter5 The Business Enterprise: Theory of the Firm 4. The Total and Marginal Product Curves: When marginal product Rises, total product increases by increasing amounts. Decreases, total product increases by decreasing amounts. Equals zero, total product is at a maximum. Is negative, total product is decreasing. 5. Average Product (Productivity) Average product of labor:
Chapter5 The Business Enterprise: Theory of the Firm 5 L L K q L q input labor output AP L ) , ( = = = Average product of capital: K L K q K q input capital output AP K ) , ( = = = Example: 6. Geometry of average and marginal product. When the average product of labor is at a maximum, average and marginal productivities of labor are equal. Example: Suppose the production function for widgets during a particular period can be represented by: 3 3 2 2 600 ) , ( L K L K L K q q - = = Find the marginal and average products of labor. 7. Iso-product curve: shows those combinations of K and L that can produce a given level of output (say, q 0 ). Mathematically, an iso-product curve records the combinations of K and L that satisfy

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4 Chapter5 The Business Enterprise: Theory of the Firm 0 ) , ( q L K q = Example: Greater rates of output are represented by isoquants farther from the origin. Slope down to the right.
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This note was uploaded on 05/04/2011 for the course ECON 102 taught by Professor Gini during the Spring '11 term at Salt Lake Community College.

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CH_05_B - CHAPTER 5 (CONT.) THE BUSINESS ENTERPRISE: THEORY...

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