Comm 295 - Class 5 Notes

Comm 295 - Class 5 Notes - Comm 295 Production (5.1-5.5)...

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Comm 295 Production (5.1-5.5) 5.1 PRODUCTION - A firm uses a technology or production process to transform inputs or factors of production into outputs - 3 types of inputs: o Capital ( K ) : services provided by long-lived inputs such as land, buildings and equipment o Labour ( L ) : human services (eg managers, skilled workers, less-skilled workers) o Materials ( M ) : natural resources and raw goods (eg oil, water) and processed products (eg plastic) - Output can be a service (eg tune-up) or a physical product (eg vehicle) PRODUCTION FUNCTIONS Production function : relationship between quantities of inputs used and the maximum quantity of output that can be produced, given current knowledge about technology and organization q = f ( L,K ) - q is units of output, L is units of labor services, K is units of capital - This shows maximum amount, may not be the most efficient Efficient production : achieves technological efficiency; uses this if cannot produce its current level of output with fewer inputs, given existing knowledge about technology and organization of production TIME AND THE VARIABILITY OF INPUTS Short run : a period of time so brief that at least one factor of production cannot be varied practically Fixed input : a factor that cannot be varied practically in short run Variable input : a factor of production whose quantity can be changed readily by the firm during the relevant time period Long run : a lengthy enough period of time that all relevant inputs can be varied no fixed inputs, all inputs are variable - Time is subjective, no specific time period 5.2 SHORT-RUN PRODUCTION - A period in which there is at least one fixed input THE TOTAL PRODUCT FUNCTION - Hold capital ( K ) FIXED, labor ( L ) VARIABLE - The exact relationship between output or total product and labor - As number of workers increase, total output first increases then decreases o Initially, when number of workers increase, efficiency and production increases o But when maximum number of workers in the factory is exceeded, workers get in each others way and become inefficient, and output decreases THE MARGINAL PRODUCT OF LABOUR Marginal product of labor ( MP L ): change in total output resulting from using an extra unit of labor, holding other factors (capital)
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Comm 295 - Class 5 Notes - Comm 295 Production (5.1-5.5)...

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