Chapter 8 - Krugman_Econ_CH08_181 9/8/04 12:10 PM Page 181...

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employ more inputs—more fertilizer and, especially, more labor—per acre. Of course, this means that European farmers have higher costs than their American counter- parts. But because of government policies, European farmers receive a much higher price for their wheat than American farm- ers. This gives them an incentive to use more inputs and to expend more effort at the mar- gin to increase the crop yield per acre. Notice our use of the phrase “at the margin.” Like most decisions that involve a comparison of benefits and costs, decisions about inputs and production involve a comparison of marginal quantities—the marginal cost versus the marginal benefit of producing a bit more from each acre. In Chapter 7 we used the example of Felix’s Lawn-Mowing Service to illustrate the principle of marginal analysis , showing THE FARMER’S MARGIN 181 BEAUTIFUL FOR SPACIOUS SKIES , FOR amber waves of grain.” So begins the song “America the Beautiful.” And those amber waves of grain are for real: though farmers are now only a small minority of America’s population, our agri- cultural industry is immensely productive and feeds much of the world. If you look at agricultural statistics, however, something may seem a bit sur- prising: when it comes to yield per acre, U.S. farmers are often nowhere near the top. For example, farmers in western European countries grow about three times as much wheat per acre as their U.S. coun- terparts. Are the Europeans better at grow- ing wheat than we are? No: European farmers are very skillful, but no more so than Americans. They pro- duce more wheat per acre because they Behind the Supply Curve: Inputs and Costs >> What you will learn in this chapter: The importance of the firm’s production function, the relationship between quantity of inputs and quantity of output Why production is often subject to diminishing returns to inputs What the various forms of a firm’s costs are and how they generate the firm’s marginal and average cost curves Why a firm’s costs may differ in the short run versus the long run How the firm’s technology of production can generate economies of scale O American farming practices (at left) or European farming practices (at right)? How intensively an acre of land is worked—a decision at the margin—depends on the price of wheat a farmer faces. Peter Dean/Agripicture/Grant Heilman Photography W. Wayne Lockwood, M. D./Corbis chapter 8 Krugman_Econ_CH08_181 9/8/04 12:10 PM Page 181
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182 PART 4 THE PRODUCER The Production Function A firm is an organization that produces goods or services for sale. To do this, it must transform inputs into output. The quantity of output a firm produces depends on the quantity of inputs; this relationship is known as the firm’s production function . As we’ll see, a firm’s production function underlies its cost curves . But as a first step, let’s look at the characteristics of a hypothetical production function.
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This note was uploaded on 05/09/2011 for the course MATH 1105 taught by Professor Kyle during the Fall '10 term at Austral Chile.

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Chapter 8 - Krugman_Econ_CH08_181 9/8/04 12:10 PM Page 181...

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