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Production

Production. Recall that. Total Product- total output of a particular good or service produced by a firm Marginal Product- additional output produced for every one additional unit of input employed (say, labor). Average Product- ratio of output to input.

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Production

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  1. Production

  2. Recall that • Total Product- total output of a particular good or service produced by a firm • Marginal Product- additional output produced for every one additional unit of input employed (say, labor). • Average Product- ratio of output to input

  3. Law of Diminishing Returns- as successive units of variable resource are added to fixed resource. Marginal product that can be attributed to each additional unit of variable resource will decline.

  4. Stages of production

  5. SHORT RUN COSTS • TC= TFC+TVC • AFC= TFC/Q • AVC= TVC/ Q • ATC= AFC+AVC • MC= ∆TC/∆Q

  6.  As the total number of goods produced increases, the average fixed cost decreases because the same amount of fixed costs is being spread over a larger number of units of output.

  7. As added input increases, AVC declines initially, reaches a minimum, and then increases again.

  8. MARGINAL COST= is the extra , or additional, cost of producing more unit of output. • MC= change in TC/ change in Q

  9. Marginal cost designates all the cost incurred in producing the last unit of output.

  10. MP and MC relationship

  11. Changes in either resource prices will cause costs to change and cost curves to shift.

  12. SampLe Exercises

  13. A firm has Fixed costs of P60.00 and variable costs as indicated in the table below.

  14. Long RUN COSTS • In the long run, all factors of production are variable..

  15. Q=f (L,K)

  16. The length of the long run differs from industry to industry depending upon the nature of production.

  17. The long-run ATC curve is generally U-shaped.

  18. The long run ATC curve is composed of segments of SR ATC curves, and it represents the various plant sizes a firm can construct in the long run.

  19. Economies of scale- reductions in the average total cost of producing a product as the firm expands the size of plant

  20. Economies of scale are first encountered as a small firm expands. • Greater specialization in the use of labor and management, the ability to use of labor and management, and the spreading of start-up costs among more units of output all contribute to economies of scale.

  21. As the firm continues to grow, it encounter diseconomies of scale stemming from managerial complexities that accompany large-scale production.

  22. How the output of a business responds to a change in factor inputs is called returns to scale • It refers to changes in output resulting from a proportional change in all inputs (where all inputs increase by a constant factor). 

  23. Increasing returns to scale occur if output increases by more than that proportional change • Decreasing returns to scale occur if output increases by less than that proportional change • Constant returns to scale occur if output increases by that same proportional change then there are

  24. A firm's production function could exhibit different types of returns to scale in different ranges of output. • Typically, there could be increasing returns at relatively low output levels, decreasing returns at relatively high output levels, and constant returns at one output level between those ranges.

  25. Good 1 Good 2 Both

  26. A. Does Good 1 indicate economies of scale? Why? • B. Does Good 2 indicate economies of scale?Why? • C. Do the two goods indicate economies of scope? Why?

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