9. q = f (K, L, M…) 4.4 The Production Process Input: Raw Material Input: Capital Input: Labour Output Technology Input decision : >>How many >>Which types Cost decision Selling price
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12. A Production Function and Total Cost For Hungry Helen’s Cookie Factory QUANTITY OF WORKERS OUTPUT MP AP COST OF FACTORY COST OF WORKERS TOTAL COST 0 1 2 3 4 5 6 7 8 0 2 5 9 12 14 15 15 14 - 2 3 4 3 2 1 0 -1 - 2 2.5 3 3 2.8 2.5 2.1 1.8 $30 30 30 30 30 30 30 30 30 $0 10 20 30 40 50 60 70 80 $30 40 50 60 70 80 90 100 110
13. Number of Workers Hired Quantity of output TP Hungry Helen’s Production Function
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17. Labor Labor TP AP, MP Stage 1 Stage 2 Stage 3 TP AP MP Stages of Production B C A
18. Increasing Marginal Returns Total Product, TP Quantity of Labor Average Product, AP, and Marginal Product, MP Quantity of Labor Total Product Marginal Product Average Product Increasing Marginal Returns
19. Diminishing Marginal Returns Total Product, TP Quantity of Labor Average Product, AP, and Marginal Product, MP Quantity of Labor Total Product Marginal Product Average Product Diminishing Marginal Returns
20. Negative Marginal Returns Total Product Quantity of Labor Average Product, and Marginal Product Quantity of Labor Total Product Marginal Product Average Product Negative Marginal Returns
28. Quantity of Output Costs $3.00 2.50 2.00 1.50 1.00 0.50 0 4 2 6 8 14 12 10 MC ATC AVC AFC Marginal Cost declines at first and then increases due to diminishing marginal product. Note how MC hits both ATC and AVC at their minimum points. AFC declines when output increases .
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30. Productivity and Costs Are Mirror Images MP AP MC AVC Pull down the average Pull up the average Costs (dollars) Average Product and Marginal Product Quantity of labor Quantity of output
36. 4.8 Long Run Cost Curve >> No fix scale of operation << Larger scale Smaller scale Economies of scale Diseconomies of scale Reduce production cost Growth constraint Constant return to scale Reflect in the firm’s long run average cost (LRAC) is U-shape Effect on average cost No effect on the cost
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41. Quantity of Cars per Day 0 Average Total Cost Long Run Average Cost Curve ATC 1,000 10,000 Economies of scale Diseconomies of scale Constant returns to scale
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