Lecture 4 notes - Firms and Production: Lecture Review In...

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BE 530 Page 1 of 3 Lecture 4 Firms and Production: Lecture Review In the last two lectures, we have focused on the demand and supply models. Now we 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. INPORTANT CONCEPTS Production Function A production function represents how inputs are transformed into outputs by a firm. In particular, a production function describes the maximum 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, q, resulting 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
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Lecture 4 notes - Firms and Production: Lecture Review In...

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