Chapter6(21)

Chapter6(21) - Chapter 6 (21): Costs of Production The...

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Unformatted text preview: Chapter 6 (21): Costs of Production The Production Function Resources are used in producing goods and services. These resources are called factors of production . The basic factors include land, labor and capital. The costs of production are measured as the costs of those resources. To asses these costs, we should know that given an amount of the resources, what is the best way of producing a product? Or that’s the maximum amount attainable from a given quantity of resources? The answer to these questions is reflected in the production function. Thus this function defines a relation between maximum amount of output for given amount of inputs, holding technology constant. In this case, the production function represents maximum technical efficiency. Varying Input Levels: Table 21.1 reports a production function for the Tight Jeans Corporation. The output is pairs of jeans per day, and the inputs include workers (labor) per day and sewing machines (capital) per day. If both labor and capital change freely without any amount is fixed, we are in a planning period and the production function is in the long term . Table 21.1: Production Function Schedule for Producing Pairs of Jeans Both capital and labor are essential inputs for production. If sewing machines are zero, then output is zero regardless of how many workers are used. Additionally, the output (pairs of jeans) is zero regardless of how many sewing machines we rent. If we use one worker per day and one machine per day the maximum attainable output from this particular input combination is 15 pairs of jeans. If we employ two workers and rent two machines per day, the total output is 46 pairs of jeans per day. Short-Run Production Function: In the short-run, there are constraints on increasing certain inputs, particularly, capital. In other words, there are constraints on capacity of facilities. In Table 21.2 the capacity constraint is fixing the number of machines and moving row-wise. If sewing machines = 1, then increasing labor will give us a short-run production function associated with one machine, and so on. Fig. 21.1: Short-run Production Function Along this short run production function, total output increases as input (workers) increases until the 7 th worker where output is flat. For workers = 8, total output declines. Fig. 22.2: Marginal Physical Product: Marginal Productivity Marginal productivity of labor is a movement along short-run production function. Suppose the number of machines is fixed at on e . Then the first worker adds 15 jeans to total output per day. If we add a second worker, this worker increases total output by 19 jeans per day. This increase in productivity of the second worker is because of specialization among the two workers. There is no difference in quality between the workers. Thus, it does not mean that the first worker is lazy and the second worker is more hard-working. If you reverse the order, you get the same productivity. This productivity is called marginal physical product (MPP).productivity is called marginal physical product (MPP)....
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This note was uploaded on 01/12/2012 for the course ECON 201 taught by Professor Joyce during the Fall '07 term at Drexel.

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Chapter6(21) - Chapter 6 (21): Costs of Production The...

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