1 / 7

Economics 101: Principles of Economics

Economics 101: Principles of Economics. Questions? Read Ch. 13 and 14 Data Assignment #1 handout Learning Excel … (a) Extra session next Tuesday in Chambers 337 computer lab and/or (b) TA session next Thursday 9-10 pm in Chambers 337. Production.

peter-nguyen
Download Presentation

Economics 101: Principles of Economics

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Economics 101: Principles of Economics • Questions? • Read Ch. 13 and 14 • Data Assignment #1 handout • Learning Excel … (a) Extra session next Tuesday in Chambers 337 computer lab and/or (b) TA session next Thursday 9-10 pm in Chambers 337

  2. Production • So far we’ve looked at consumer behavior, assuming the supply of goods & services was given • What determines the quantity of goods a firm produces? • How productive are our inputs (K, L, land, raw materials)? • What is our technology in the production process? • How much do they cost? We want to minimize costs. • What is the profit-maximizing level of output? • Begin with a production function which represents the relationship between inputs and output: Q = f (L, K, M, …) Tells us the maximum output level, Q, for given inputs (L, K, M, etc.) using technology “f ”

  3. Short-term Production • Of course there are dozens (hundreds?) of inputs • Short-term is a period of time over which the use of a given input is very costly to change. (land, building, etc.) In the long-run, all inputs are variable. • Assume that K is fixed in short-term and L is the only input that a firm can change. (two input model) • Total Product = total output produced by a firm • Average Product of Input i = total product divided by amount of input used to make that total product • Marginal Product of Input i = change in total output that results from a one-unit change in the amount of input, holding other inputs constant

  4. Production with One Variable Input APL= Q/LMPL= (Q/ L)|K --- --- 5 5 9 13 10 12 10 10 9 5 8 3 7 1 6.1 0 5 -4 • Short-run vs. Long-run CapitalLaborTotal Product (Q) 3 0 0 3 1 5 3 2 18 3 3 30 3 4 40 3 5 45 3 6 48 3 7 49 3 8 49 3 9 45

  5. Geometry of TP, APL, MPL Q • APL = Q/L • APL at a given level of L is the slope of ray from origin to TP curve • MPL= Q/L • MPL measures how much Q changes for another unit of L, holding K constant • MPL at a given level of L is the slope of TP curve at that point • MPL rises until the inflection point (about L = 2) and then falls • When MPL = 0, TP is at maximum 49 TP 40 18 2 4 8 L Q per worker MPL 13 10 APL 2 4 8 L

  6. Key characteristics: If MPL > 0, TP rises If MPL < 0, TP falls If MPL = 0, TP at maximum If MPL > APL, APL rising If MPL < APL, APL falling MPL = APL at APL’s max Examples: avg height in room Batting averages Total, Average, and Marginal Product Q 49 TP 40 18 2 4 8 L Q per worker MPL 13 10 APL 2 4 8 L

  7. Diminishing Marginal Returns • Diminishing Marginal Returns is an empirical observation about how output responds to more inputs. • It means that as the amount of some input is increased (in equal increments), the changes in output will become smaller after some point. • Key points: 1. It says the MPL begins to decrease after some point, not that it becomes negative. Malthus’ prediction: “With fixed land and diminishing MPL, food supplies will become insufficient”. What did he miss? 2. Ceteris paribus. i.e., other inputs are held constant: K, energy, raw materials, & technology. If you find a better way to produce, that shifts your entire TP curve!

More Related