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Production curves
- 1. Production and Costs Production Function
- 2. Profit = Total revenue – Total cost What is the goal of business? We assume that the firm’s goal is to maximize profit.
- 3. Profit = Total revenue – Total cost the amount a firm receives from the sale of its output the market value of the inputs a firm uses in production What is the goal of business? We assume that the firm’s goal is to maximize profit.
- 4. The Production Function Production Function - Amount of outputs that can be produced with a given set of inputs
- 5. The Production Function Production Function - Amount of outputs that can be produced with a given set of inputs a.) Short run production b.) Long run production -Most resources are fixed. To increase output a firm must increase the quantity of labor it employs -Everything is variable Everything we willEverything we will discuss will be shortdiscuss will be short run productionrun production
- 6. Profit = Total revenue – Total cost Costs summary:__________________________ Goods and Services produced Time Production summary:____________________ Summarizing all theSummarizing all the pieces of this generalpieces of this general topictopic
- 7. Profit = Total revenue – Total cost Costs summary:__________________________ Goods and Services produced Time Production summary:____________________ (TP) Total Product (MP) Marginal Product (AP) Average Product Economic Profit Accountant Profit Explicit Costs Implicit Costs Short Run 1.)Fixed Costs 2.)Variable Costs Long Run 1.) All Variable (TC) Total Cost 1.) (TFC) Total Fixed cost 2.) (TVC) Total Variable cost (MC) Marginal Cost (AC) Average Cost 1.) (ATC) Average Total cost 2.) (AFC) Average Fixed cost 3.) (AVC) Average Variable cost 1.)Depreciation 2.) Normal Profit (MP or MPL) Marginal Product of Labor (DMR) Decreasing Marginal Returns (TR) Total Revenue (MR) Marginal Revenue (AR) Average Revenue
- 8. Profit = Total revenue – Total cost Costs summary:__________________________ Goods and Services produced Time Production summary:____________________ (TP) Total Product (MP) Marginal Product (AP) Average Product (MP or MPL) Marginal Product of Labor (DMR) Decreasing Marginal Returns But will just start withBut will just start with this part in this PPTthis part in this PPT
- 9. (TP) Total Product - is the total Q of a good produced in a given period. -increases as the Q of labor employed increases until the point that reaches DMR -Most resources are fixed. To increase output a firm must increase the quantity of labor it employs Short Run Production
- 10. Points A through H on the curve correspond to the columns of the table. The TP curve is like the PPF: It separates attainable points and unattainable points. (TP) Total Product graph for a business producing bottled water
- 11. Points A through H on the curve correspond to the columns of the table. The TP curve is like the PPF: It separates attainable points and unattainable points. (TP) Total Product graph for a business producing bottled water It’s similar concepts to aIt’s similar concepts to a PPC curve, but for anPPC curve, but for an individual firm withindividual firm with inputs and outputsinputs and outputs
- 12. - increase in output from an additional unit of that input, holding all other inputs constant. (MP) Marginal Product -Most resources are fixed. To increase output a firm must increase the quantity of labor it employs Short Run Production (TP) Total Product
- 13. We can show marginal product as the orange bars that form steps along the total product curve. The height of each step represents marginal product.
- 14. Notice that the steeper the slope of the TP curve, the greater is MP marginal product.
- 15. Notice that the steeper the slope of the TP curve, the greater is MP marginal product. The slope of the TP curveThe slope of the TP curve is the MP curve!is the MP curve!
- 16. (MP) Marginal Product -Most resources are fixed. To increase output a firm must increase the quantity of labor it employs Short Run Production (TP) Total Product - change in (TP) that results from a one-unit increase in the quantity of labor employed. (MPL) Marginal Product of Labor ________________%% QQ LL%% ______________________ - Percent change in Quantity of output - Percent change in Quantity of Labor Equation:
- 17. (MPL)=2 聘 用 一 名 工 人 (MPL) Marginal Product of Labor
- 20. Notice that the steeper the slope of the TP curve, the greater is MP marginal product.
- 21. (MP) Marginal Product Short Run Production (TP) Total Product (MPL) Marginal Product of Labor Increasing Marginal Returns Decreasing Marginal Returns (DMR) Negative Marginal Returns - MP of an additional worker > MP of the previous worker. - MP of an additional worker < MP of the previous worker. - If you are doing this you are an idiot.
- 22. (MP) Marginal Product Short Run Production (TP) Total Product (MPL) Marginal Product of Labor (DMR) Decreasing Marginal Returns - As a firm uses more of a variable input, with given fixed inputs, the MP of the variable input eventually decreases. Law of Decreasing Returns
- 26. • Increasing marginal returns initially • Decreasing marginal returns eventually • Negative marginal returns The total product (TP) and marginal product (MP) curves incorporate a feature of all production processes:
- 27. (MP) Marginal Product -Most resources are fixed. To increase output a firm must increase the quantity of labor it employs Short Run Production (TP) Total Product (AP) Average Product ______________TPTP # of workers# of workers ______________________- Total Product - Number of workers is the total product per worker employed. *** When marginal product exceeds average product, average product is increasing. Equation:
- 28. -Most resources are fixed. To increase output a firm must increase the quantity of labor it employs Short Run Production ( AP) Average Product When MP > AP, AP is increasing. (MP) Marginal Product and When MP < AP, AP is decreasing. When MP = AP, AP is at its maximum.
- 29. When marginal product exceeds average product, average product is increasing. When marginal product is less than average product, average product is decreasing. When marginal product equals average product, average product is at its maximum.
- 30. When marginal product exceeds average product, average product is increasing. When marginal product is less than average product, average product is decreasing. When marginal product equals average product, average product is at its maximum.MP and AP go up togetherMP and AP go up together and go down together just atand go down together just at different rates because theydifferent rates because they are measuring differentare measuring different thingsthings
- 31. Zheng is a part-time student who takes one course each semester. Her grades are First semester: Calculus - C (2) Second semester: French - B (3) Third semester: Economics - A (4) Fourth semester: History - B (3) Fifth semester: English - C (2) Marginal and Average Values in YOUR Life Zheng’s grade in each semester is her marginal grade, which increases from 2 to 3 to 4 and then decreases to 3 to 2. What is Zheng’s average grade after each semester? An Example:
- 32. The red curve shows Zheng’s marginal grade. The blue curve shows Zheng’s average grade. When Zheng’s marginal grade exceeds her average grade, the average rises. When Zheng’s marginal grade is less than her average grade, the average falls. Marginal and Average Values in YOUR Life An Example:
- 33. So to summarize…
- 34. Profit = Total revenue – Total cost Costs summary:__________________________ Goods and Services produced Time Production summary:____________________ (TP) Total Product (MP) Marginal Product (AP) Average Product (MP or MPL) Marginal Product of Labor (DMR) Decreasing Marginal Returns This covers theThis covers the production sideproduction side
- 35. Points A through H on the curve correspond to the columns of the table. The TP curve is like the PPF: It separates attainable points and unattainable points. (TP) Total Product graph for a business producing bottled water It’s similar concepts to aIt’s similar concepts to a PPC curve, but for anPPC curve, but for an individual firm withindividual firm with inputs and outputsinputs and outputs
- 36. We can show marginal product as the orange bars that form steps along the total product curve. The height of each step represents marginal product.
- 37. Notice that the steeper the slope of the TP curve, the greater is MP marginal product. The slope of the TP curveThe slope of the TP curve is the MP curve!is the MP curve!
- 38. When marginal product exceeds average product, average product is increasing. When marginal product is less than average product, average product is decreasing. When marginal product equals average product, average product is at its maximum. MP and AP go up together and goMP and AP go up together and go down together just at different ratesdown together just at different rates because they are measuring differentbecause they are measuring different thingsthings
- 39. The endThe end Thank youThank you
Editor's Notes
- The grade point average versus marginal grade example (see slide 69) in the text is outstanding to use in class to describe how the marginal product and marginal cost curves relate to the average product and average cost curves. Once students can tell a story using the same intuition, they find drawing those curves much easier. While you have the curves drawn on the board or overhead, physically pull the average cost curves down (while marginal cost is below) or pull them up (when the marginal cost curve rises above). Use theatrics: raise your hands over your head and “pull down the curves.” If you have a more sports-oriented class, you can try using a batting average percentage and at-bat outcome example (if you had a .300 batting average and you struck out at your next at-bat [the marginal factor], your batting average is pulled down).
- The grade point average versus marginal grade example (see slide 69) in the text is outstanding to use in class to describe how the marginal product and marginal cost curves relate to the average product and average cost curves. Once students can tell a story using the same intuition, they find drawing those curves much easier. While you have the curves drawn on the board or overhead, physically pull the average cost curves down (while marginal cost is below) or pull them up (when the marginal cost curve rises above). Use theatrics: raise your hands over your head and “pull down the curves.” If you have a more sports-oriented class, you can try using a batting average percentage and at-bat outcome example (if you had a .300 batting average and you struck out at your next at-bat [the marginal factor], your batting average is pulled down).
- Start the experiment by defining that a day lasts for 1 minute. Get the class to keep time. On day 1, have 1 worker produce widgets. On day 2, have 2 workers, and so on. You’ll probably run for 10 to 12 days before you get to almost zero marginal product. Record the inputs and outputs in a table on the board. Have some fun with quality control, shirking, and cheating. The auditor must ensure that old widgets and partly made widgets don’t get used in a subsequent day. Each day must start clean. Now comes the assignment (Stage 1): Get the students to calculate marginal product and average product from the total product numbers that you’re recorded on the board. Get them to make graphs of the total product, marginal product, and average product curves. Get them to describe the curves and to explain their similarities with and differences to the curves for smoothies in the textbook. The first assignment covers only production. If you want, you can extend the experiment with another assignment (Stage 2): Use the data from your widget production experiment. Tell the students the cost of the capi240 tal and the wage rate of a worker. (Make up the numbers. Any will do.) Tell the students to calculate total cost, marginal cost, and average cost. Get them to make graphs of the total cost, marginal cost, and average cost curves. Get them to describe the curves and to explain their similarities with and differences to the curves for smoothies in the textbook. This assignment and the previous one make an outstanding assignment for credit or extra credit.
- The grade point average versus marginal grade example (see slide 69) in the text is outstanding to use in class to describe how the marginal product and marginal cost curves relate to the average product and average cost curves. Once students can tell a story using the same intuition, they find drawing those curves much easier. While you have the curves drawn on the board or overhead, physically pull the average cost curves down (while marginal cost is below) or pull them up (when the marginal cost curve rises above). Use theatrics: raise your hands over your head and “pull down the curves.” If you have a more sports-oriented class, you can try using a batting average percentage and at-bat outcome example (if you had a .300 batting average and you struck out at your next at-bat [the marginal factor], your batting average is pulled down).