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Firms and Production: Lecture Review
In the last two lectures, we have focused on the demand and supply models.
turn to the supply side and examine the behavior of producers.
We will see how firms
can produce efficiently and how their costs of production change with changes in both
input prices and the level of output.
In this lecture and the next we discuss the theory of
the firm, which describes how a firm makes cost – minimizing production decisions and
how the firm’s resulting cost varies with its output.
Our knowledge of production and
cost will help us understand the characteristics of market supply.
A production function represents how inputs are transformed into outputs by a firm.
In particular, a production function describes the
output that a firm can produce
for each specified combination of inputs. In the short run, one or more factors of
production cannot be changed, so a short-run production function tells us the maximum
output that can be produced with different amounts of the variable inputs, holding fixed
inputs constant. In the long-run production function, all inputs are variable.
Marginal Product of Labor (MPL)
In general the marginal product is the additional output produced as an input is increased
by one unit.
The marginal product of labor is the change in total output,
from using an extra unit of labor, l, holding other factors constant.
The marginal product of labor is likely to increase initially because when there are more
workers, each is able to specialize on an aspect of the production process in which he or
she is particularly skilled. For example, think of the typical fast food restaurant. If there is
only one worker, he will need to prepare the burgers, fries, and sodas, as well as take the
orders. Only so many customers can be served in an hour. With two or three workers,
each is able to specialize, and the marginal product (number of customers served per
hour) is likely to increase as we move from one to two to three workers. Eventually, there
will be enough workers and there will be no more gains from specialization. At this point,
the marginal product will begin to diminish.
The marginal product of labor will eventually diminish because there will be at least one
fixed factor of production, such as capital. As more and more labor is used along with a
fixed amount of capital, there is less and less capital for each worker to use, and the
productivity of additional workers necessarily declines. Think for example of an office