PRODUCTION

RECALL THAT

Total Product- total output of a particular good or service produced by a firm Marginal Product- additional output produced for every one additional unit of input employed (say, labor). Average Product- ratio of output to input

Law of Diminishing Returns- as successive units of variable resource are added to fixed resource. Marginal product that can be attributed to each additional unit of variable resource will decline.

STAGES OF PRODUCTION

SHORT RUN COSTS

TC= TFC+TVC

AFC= TFC/Q AVC= TVC/ Q ATC= AFC+AVC

MC= TC/Q

TP/ Q 0 1

TFC 100 100

TVC 0 90

TC 100 190

AFC

AVC

ATC

MC

100

90.00

190

90

2
3 4

100
100 100

170
240 300

270
340 400

50
33.33 25

85.00
80.00 75.00

135
113.33 100

80
70 60

5
6 7 8 9 10

100
100 100 100 100 100

370
450 540 650 780 930

470
550 640 750 880 1030

20
16.67 14.29 12.50 11.11 10.00

74.00
75.00 77.14 81.25 86.67 93.00

94
91.67 91.43 93.75 97.78 103.00

70
80 90 110 130 150

As the total number of goods produced increases, the average fixed cost decreases because the same amount of fixed costs is being spread over a larger number of units of output.

As added input increases, AVC declines initially, reaches a minimum, and then increases again.

MARGINAL COST= is the extra , or additional, cost of producing more unit of output. MC= change in TC/ change in Q

Marginal cost designates all the cost incurred in producing the last unit of output.

MP AND MC RELATIONSHIP

Changes in either resource prices will cause costs to change and cost curves to shift.

SAMPLE EXERCISES
Input 0 1 2 3 4 TP 0 15 34 51 65 Marginal Product Average product

5
6 7 8

74
80 83 82

A FIRM HAS FIXED COSTS OF P60.00 AND VARIABLE COSTS AS INDICATED IN THE TABLE BELOW.
TP 0 1 2 3 4 5 6 7 8 TFC TVC 0 45 85 120 150 185 225 270 325 TC AFC AVC ATC MC

9 10

390 465

LONG RUN COSTS

In the long run, all factors of production are variable..

Q=f (L,K)

The length of the long run differs from industry to industry depending upon the nature of production.

The long-run ATC curve is generally U-shaped.

The long run ATC curve is composed of segments of SR ATC curves, and it represents the various plant sizes a firm can construct in the long run.

Economies of scale- reductions in the average total cost of producing a product as the firm expands the size of plant

Economies of scale are first encountered as a small firm expands.

Greater specialization in the use of labor and management, the ability to use of labor and management, and the spreading of start-up costs among more units of output all contribute to economies of scale.

As the firm continues to grow, it encounter diseconomies of scale stemming from managerial complexities that accompany large-scale production.

How the output of a business responds to a change in factor inputs is called returns to scale It refers to changes in output resulting from a proportional change in all inputs (where all inputs increase by a constant factor).

Increasing returns to scale occur if output increases by more than that proportional change Decreasing returns to scale occur if output increases by less than that proportional change Constant returns to scale occur if output increases by that same proportional change then there are

A firm's production function could exhibit different types of returns to scale in different ranges of output.

Typically, there could be increasing returns at relatively low output levels, decreasing returns at relatively high output levels, and constant returns at one output level between those ranges.

Good 1 Q1 10 20 30 Cost 50 100 150

Good 2 Q2 10 20 30 Cost 60 100 130 Q1 10 20 30

Both Q2 10 20 30 Cost 100 180 250

A. Does Good 1 indicate economies of scale? Why? B. Does Good 2 indicate economies of scale?Why?

C. Do the two goods indicate economies of scope? Why?