Understanding Production Costs: Maximizing Efficiency and Profitability

1. Contemporary Economics:An Applications ApproachBy Robert J. Carbaugh3rd Edition Chapter 4: Production and the Costs of Production

2. Production Functions Short-run production function Production table for block company Labor input Total product Marginal product (workers per day) (output per day) (output per day) 0 0 1 1,000 1,000 2 2,200 1,200 3 3,500 1,300 4 4,700 1,200 5 5,800 1,100 Carbaugh, Chap. 4

3. 0 1 2 3 4 5 0 1 2 3 4 5 Production Functions Short-run production functions (cont’d) Marginal product curve Total product curve Total product Marginal product Diminishing marginal returns Increasing marginal returns TP 5800 4700 1300 1200 MP 3500 1100 1000 2200 1000 Labor input Labor input Carbaugh, Chap. 4

4. Labor input Labor input Production Functions Shifts in product curves Increase in total product curve Increase in marginal product curve TP1 Total product Marginal product TP0 MP1 MP0 Carbaugh, Chap. 4

5. Output per day Output per day Average Costs Hypothetical short-run cost schedules Average total cost Total Cost Costs Total cost Total variable cost Average variable cost Total fixed cost Marginal cost 50 Carbaugh, Chap. 4

6. Quantity produced Long-Run Costs Hypothetical long-run average total cost curve Cost per unit Economies of scale Diseconomies of scale Constant returns to scale LRATC Q2 Q1 Carbaugh, Chap. 4

7. Output Changing Costs Shifts in cost curves MC0 ATC0 Initial minimum cost Cost per unit MC1 ATC1 C0 C1 Minimum cost after technological improvement, fall in resource prices or fall in taxes Carbaugh, Chap. 4