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AAEC 2305 Fundamentals of Ag Economics ___________________________

AAEC 2305 Fundamentals of Ag Economics ___________________________. Chapter 6 pages 146 - 151. Production of Multiple Outputs _______________________________________________________________________________________________.

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AAEC 2305 Fundamentals of Ag Economics ___________________________

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  1. AAEC 2305Fundamentals of Ag Economics___________________________ Chapter 6 pages 146 - 151

  2. Production of Multiple Outputs _______________________________________________________________________________________________ • If a firm is producing two products – How does it decide how much of each to produce? • The decision depends on the degree of: 1) Supplementarity 2) Complementarity 3) Competition between the two goods.

  3. Production Possibilities Frontier _______________________________________________________________________________________________ • Production Possibilities Frontier (PPF) – a curve depicting the maximum amount of various combinations of two products that can be produced using a given (or fixed) level of inputs. • Marginal Rate of Product Substitution (MRPS) – measures the slope of the PPF • MRPS describes the rate at which one output must be decreased as production of the other product is increased. • MRPS = Δ Y1 / Δ Y2

  4. (continued) _______________________________________________________________________________________________ • The curve is called a frontier because it shows the maximum that can be produced. • The curve of the PPF is the result of the law of diminishing marginal returns. • The shape of the curve indicates that the goods are substitutes in production, which means they compete for resources in production.

  5. Possible PPF Relationships _______________________________________________________________________________________________ • Competition – occurs when increasing the output of one product reduces the output of the other. • Complementary – occurs when increasing the output of one product increases the output of the other. • Supplementary – occurs when the two products use different resources or the same resources at different times.

  6. Isorevenue Line _______________________________________________________________________________________________ • Isorevenue line – a line depicting all combinations of two products that will generate a given (or same) level of total revenue. • Slope of the Isorevenue line is equal to the negative inverse of the price ratios.

  7. Production of Multiple Outputs _______________________________________________________________________________________________ • The firm maximizes profit by operating where the isorevenue line is tangent to the PPF. • Therefore, the profit-maximizing output levels occur where the slope of the PPF equals the slope of the isorevenue line.

  8. Determinants of Supply • Basic factors that determine the firm’s supply curve (and the factors that will cause the supply curve to shift) • Production technology • Prices of inputs used in production • Taxes and subsidies on variable inputs • Prices of other products produced • Uncontrollables • Expectations about future prices • Number of sellers

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