Economics 2010

1. Economics 2010 Lecture 11 Organizing Production (I) Production and Costs (The short run)

2. Output and Costs • Product Concepts and Definitions • Product Curves • Cost Concepts and Definitions • Short-Run Cost Curves

3. Product Concepts and Definitions • Total product (TP)is the number of units of output produced in a given time period. • Marginal product (MP)is the increase in total product, TP, resulting from a one-unit increase in the amount of the variable factor (labor) employed. • Average product (AP)is total product per unit of the variable factor (labor) employed.

4. Total Product Curve • Figure shows the total product (TP)curve for sweaters • The curve separates what is attainable from what is unattainable

5. Marginal Product Curve • We show here the total product (TP)curve for sweaters again • But now, we emphasize the idea of marginal product

6. Marginal Product Curve • The marginal product (MP)curve for sweaters • Marginal product in this case increases and then diminishes • This is to be expected

7. Average Product Curve • average product (AP)curve for sweaters (purple) • and the marginal product curve (pink)

8. Average Product Curve • Average product equals marginal product at the maximum of average product

9. Average Product Curve • When marginal product exceeds average product, average product is increasing

10. Average Product Curve • When marginal product is less than average product, average product is decreasing

11. Average Product Curve • When marginal product equals average product, average product is at its maximum

12. Marginal-Average Relations • The relationship between a marginal value and an average value that you’ve just seen is universal (it is a mathematical certainty!)

13. Initial Increasing Returns • We know that as a firm uses more of a variable input, with the quantity of fixed inputs held constant, the marginal product of the variable input at first increases

14. The Law of Diminishing Returns • As a firm uses more of a variable input, with the quantity of fixed inputs held constant, the marginal product of the variable input eventually diminishes

15. Intuition on product curves • Marginal product and average product at first increase because of specialization and the division of labor • Marginal product and average product eventually diminish because the gains from specialization and the division of labor are limited and the plant eventually becomes congested • Too many people in the kitchen will spoil the broth!

16. Cost Concepts and Definitions • Total cost (TC) is the sum of the costs of all the inputs used in production. Total cost is divided into two parts: • Total fixed cost (TFC) is cost of all fixed inputs. Total fixed cost is independent of the level of output • Total variable cost (TVC) is cost of all variable inputs. Total variable cost varies with the level of output

17. Cost Concepts and Definitions TC = TFC + TVC

18. Cost Concepts and Definitions • Marginal costis the increase in TCresulting from a one-unit increase in output. It is calculated as the change in total cost divided by the change in total output

19. Cost Concepts and Definitions • Average costis cost per unit of output • Average fixed cost (AFC)is total fixed cost per unit of output. • Average variable cost (AVC)is total variable cost per unit of output. • Average total cost (ATC)is total cost per unit of output. • ATC = AFC + AVC

20. Short-run Cost Curves • Total cost curves • Average cost curves • Marginal cost curve • They apply when at least some of our inputs are fixed

21. Total Cost Curves • Look at the total cost curves for sweaters • TFC is constant at $25, remember? • TVC is based on the TP curve.

22. Total Cost Curves • TC is the sum of TFC and TVC.

23. Average and Marginal Curves • We show here the average cost curves and the marginal cost curve

24. Average and Marginal Curves • ATC is the sum of AVC and AFC • MC intersects ATC and AVC at their minimum points

25. Average and Marginal Curves • When marginal cost is less than average cost, average cost is decreasing

26. Average and Marginal Curves • When marginal cost exceeds average cost, average cost is increasing.

27. Average and Marginal Curves • When marginal cost equals average cost, average cost is at its minimum

28. Product Curves and Cost Curves • When marginal product is increasing, marginal cost is decreasing. • When marginal product is decreasing, marginal cost is increasing.

29. Product Curves and Cost Curves • When average product is increasing, average cost is decreasing • When average product is decreasing, average cost is increasing

30. Product Curves and Cost Curves • When average product is at its maximum, average variable cost is at its minimum

31. Relate the ideas of cost and product curves • Product curves are using only information from the technological cookbook • Cost curves add the information on prices too