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Class 12 mp mc supply curve 100409
- 1. Marginal Productivity and Marginal Cost How we get a neoclassical supply curve. And why it is wrong.
- 3. Thinking along the margin How do you increase output? Imagine, you are a farmer Don’t laugh. Marijuana is the largest crop in California at $14 b. It is the largest for the US at $36 billion. http://www.drugscience.org/Archive/bcr2/cashcrops.html
- 4. To increase output, hire more workers to weed, water, feed, and prune. The first workers are very productive. They are busy with lots to do.
- 5. You hire more workers. That doesn’t work so well. Your farm is getting crowded. Your new workers are less productive because they have fewer plants, fewer tools, and less space with which to work.
- 6. A good manager, you make a spreadsheet of outputs and inputs Workers Output (ounces) Marginal Product of Labor (MPL) or (ΔQ)/L Workers for marginal ounce. Inverse of MPL (L/(ΔQ)) Marginal Cost for one more ounce ($10 times Workers) 1 10 10 0.1 $1.00 2 19 9 0.11 $1.10 3 27 8 0.13 $1.30 4 34 7 0.14 $1.40 5 40 6 0.17 $1.70 6 45 5 0.2 $2.00 7 49 4 0.25 $2.50 8 52 3 0.33 $3.30 9 54 2 0.5 $5.00 10 55 1 1 $10.00
- 7. Output rises when you add workers But it increases at a diminishing rate. We call this diminishing marginal productivity of labor. Because workers have less and less with which to work, additional workers add less to your total output. 10:58:12 AM
- 8. Diminishing Marginal Productivity of Labor (or any other variable input!) Output rises with inputs But at a diminishing rate
- 9. Why does the Marginal Productivity of Labor fall? Because additional workers have less and less with which to work. MC rises because MPL falls.
- 10. Because additional workers are less and less productive, you need to add more and more of them to get the same increase in output Oops! 10:58:12 AM
- 11. Because more and more additional workers are needed to increase output, output increases come at ever rising costs. We call this increasing marginal costs
- 12. You may know that they grow pot in the hill towns around Amherst, MA. The DEA also monitors electricity usage to find grow houses. They do overflights to find “hot spots.” (Evidence of grow lamps). Personally, I think that this is a waste. 10:58:12 AM
- 13. They also grow a lot of pot in Afghanistan. (And lots of heroin.) That funds the Taliban. And the Afghan government. Strange.
- 14. The Obama Administration has stopped the persecution of medical marijuana
- 15. Why do Marginal Costs rise? Because marginal productivity falls. You need more and more labor to get the same increases in output
- 16. More and more people to get the same increase in output means you spend more and more Piles of people Piles of money
- 17. Marginal Costs rise because marginal productivity falls Because when you add workers, they run out of things to do and stuff with which to work.
- 18. But what would happen if you increased all inputs simultaneously? Additional workers would have stuff to work with! Marginal productivity of labor would not fall! Marginal costs would not rise! Inputs Falling long run marginal costs
- 19. In the long run costs fall Economies to scale and greater specialization and detail division of labor. Learning by doing: the more you do, the better you get. Improvements in technology with practice. That is why we have become more efficient even while increasing employment. Our long-run MPL curve is downward sloping.
- 20. If Marginal Costs do not rise in the long run , then what happens to the long-run supply curve? It is flat. Or downward sloping .
- 21. If the long-run supply curve is flat, then prices are flat, or even fall with rising demand! Does this sound like some products you use? To lower costs (and prices), we should encourage consumption!
Editor's Notes
- Companies have two kinds of inputs: fixed inputs, such as buildings and machinery, cannot be changed quickly, and variable inputs, such as labor and electricity, which can be changed relatively quickly. When a company wants to increase production, it does so by hiring more of the variable input. Because the variable inputs are increased while the fixed do not change, every increase in production is achieved, in the short run at least, by increasing the ratio of variable to fixed inputs. This will drive down the marginal productivity of the variable inputs because they will have less fixed inputs with which to work.
- This spreadsheet can be used to illustrate the relationship between increases in output and rising MC. The first workers hired are very productive because they have abundant fixed inputs with which to work. The marginal product of labor, or the change in output with one more worker, begins at a high level, the first worker produces 10 ounces, but falls steadily. This means that more and more workers are needed to get the same increase in output. At first, another ounce would be produced by one-tenth of a worker; by the time there are 10 workers on the crowded field, another ounce of output requires a full worker. At a wage of $10 per worker, the first ounce costs only $1.00 to produce, and the 55 th ounce costs $10.00.
- Adding workers to a fixed amount of land and other inputs leads to diminishing marginal productivity. Increasing output with a fixed amount of land and other inputs requires more and more variable inputs, like labor. Marginal costs rise because you need more-and-more variable inputs to get the same increases in output because of diminishing marginal productivity because the ratio of variable to fixed inputs rises.
- If all inputs were increased simultaneously, there would be no change in the ratio of variable to fixed inputs, and no reason for marginal productivity to fall. If marginal productivity did not fall, marginal costs would not increase. Instead, if all inputs increased simultaneously, marginal costs would probably fall because of economies to scale where firms are able to rearrange production processes when there is larger scale to increase specialization and the division of labor. It is also possible to achieve economies to scale because of physical properties, such as the increasing ratio of volume to surface area in shipping and economies in the processing of heat in chemical reactions achieved at larger scale.
- Over time, there are no fixed inputs, and all inputs can be increased simultaneously. For this reason, marginal costs will be flat or, more often, fall with increasing output over time.