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Chapter 20 Presentation 2

Chapter 20 Presentation 2. Long-run, Short-run and Diminishing Returns. Plant Capacity. The size of the factory building, the amount of machinery and equipment, and other capital resources (human-made resources such as buildings). Short-Run: Fixed Plant.

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Chapter 20 Presentation 2

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  1. Chapter 20 Presentation 2 Long-run, Short-run and Diminishing Returns

  2. Plant Capacity • The size of the factory building, the amount of machinery and equipment, and other capital resources (human-made resources such as buildings)

  3. Short-Run: Fixed Plant • Plant capacity is fixed in the short-run • The firm can vary its output by applying smaller or larger amounts of labor, materials • Can use existing plant more or less intensively • Long-Run = variable plant

  4. SR and LR Examples • Boeing hires 100 extra workers = short-run adjustment • Boeing adds a new production facility and/or installs more equipment = long-run adjustment

  5. Total Product (TP) • The total quantity or total output of a particular good or service produced

  6. Marginal Product (MP) • The extra output or added product associated with adding a unit of variable resources to the production process • MP = change in total product/change in labor input

  7. Law of Diminishing Returns • As more units of a variable resource (ie labor) are added to a fixed resource (ie land, factory), at some point the marginal product that can be attributed to each additional unit of the variable resource will decline • Ex- if more workers are hired to work w/ a constant amount of equipment, output will eventually rise by smaller and smaller amounts

  8. Average Product (AP) • AKA Labor productivity • AP = total product/units of labor

  9. Diminishing Returns Example • Farmer has a fixed resource of 80 acres planted in corn • No cultivation (weeding) leads to 40 bushels of corn • Cultivating the weeds once leads to 50 bushels • Cultivating the weeds twice leads to 57 bushels • Cultivating the weeds three time leads to 61

  10. Diminishing Returns Assumptions • 1. All units of labor are of equal quality • 2. Each successive unit is presumed to have the same ability, motor coordination, education, training and work experience • 3. MP eventually ultimately diminishes not because successive workers are less skilled but because there is a fixed amount of resources

  11. O 20.1 (3) Marginal Product (MP), Change in (2)/ Change in (1) (3) Average Product (AP), (2)/(1) (1) Units of the Variable Resource (Labor) (2) Total Product (TP) ] ] ] ] ] ] ] ] Law of Diminishing Returns - 10.00 12.50 15.00 15.00 14.00 12.50 10.71 8.75 0 10 25 45 60 70 75 75 70 0 1 2 3 4 5 6 7 8 10 15 20 15 10 5 0 -5 Increasing Marginal Returns Diminishing Marginal Returns Negative Marginal Returns

  12. O 20.2 30 Total Product, TP 20 10 0 20 Marginal Product, MP 10 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 Law of Diminishing Returns TP Increasing Marginal Returns Negative Marginal Returns Diminishing Marginal Returns AP MP

  13. Fixed Costs (Overhead) • Costs that in total do not vary with changes in output • Must be paid even if output is zero • Ex- rent, interest on debt, insurance premiums • ***incurred at all levels of output

  14. Variable Cost • Costs that change with the level of output • Ex- materials, fuel, power

  15. $1100 1000 900 800 700 600 Costs 500 400 300 200 100 0 10 1 2 3 4 5 6 7 8 9 Q Total Cost = TFC + TVC TC TVC Fixed Cost Total Cost Variable Cost TFC

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