Professional Documents
Culture Documents
THEORY
BASIC PRODUCTION
CONCEPTS
The Firm:
Production Function
Cost Function
The Firm
Firm
An organization that brings together factors of
productionlabor, land, physical capital,
human capital, and entrepreneurial skillto
produce a product or service that it hopes can
be sold at a profit
The Firm
Profit and costs
Accounting profits = total revenues - explicit costs
Explicit Costs
Costs that business managers must take account of because they
must be paid
The Firm
The goal of the firm: profit maximization
Firms are expected to try to make the
positive difference between total revenues
and total costs as large as they can.
The Relationship
Between Output and Inputs
Production Function
The relationship between inputs and output
A technological, not an economic, relationship
The relationship between inputs and
maximum physical output
The Relationship
Between Output and Inputs
Production
Any activity that results in the conversion of
resources into products that can be used in
consumption
PRODUCTION
INPUTS
Land
Labor
Capital
Raw Materials
Entrepreneur
PRODUCTION
PROCESS
Manufacturing
Assembly
Processing
Service
PRODUCTION
OUTPUT
Finished Products
Semi-processed products
Services
The Relationship
Between Output and Inputs
or
Q = (K,L)*
*Q = output/time period
K = capital
L = labor
Fixed Input
Variable Input
Necessity in Production
Supplementary; even in
their absence some
amount of production
can be carried out
Examples
Plant, machinery,
manager, land, factory
premises
TOTAL
PHYSICAL
PRODUCT (TPP)
MARGINAL
AVERAGE
PHYSICAL
PHYSICAL
PRODUCT (MPP) PRODUCT (APP)
10
10
10
30
30-10=20
15
90
90-30=60
30
120
120-90=30
30
130
130-120=10
26
120
120-130=-10
20
The Relationship
Between Output and Inputs
Marginal Physical Product
The physical output that is due to the addition
of one more unit of a variable factor of
production
The change in total product occurring when a
variable input is increased and all other inputs
are held constant
Also called marginal product or marginal
return
TC = TFC + TVC
TVC = (VC/u) (u)
TR = (Sp/u) (u)
TP = TR- TC
TR= TC (Break Even)
TR> TC (Profit)
TC>TR
(Losses)
16
14
12
10
8
6
ATC
AVC
2
0
AFC
1
2 3 4 5 6 7 8 9 10 11
Output (calculators per day)
ATC
AVC
AFC
AVC
TP
Output (calculators per day)
0
1
2
3
4
5
6
7
8
9
10
11
Total
Costs
(TC)
0
5
8
10
11
13
16
20
25
31
38
46
10
15
18
20
21
23
26
30
35
41
48
56
Marginal
Cost
(MC)
5
3
2
1
2
3
4
5
6
7
8
16
Costs (dollar per day)
Total
Output
(Q/day)
Total
Variable
Costs
(TVC)
14
12
10
MC
8
6
4
2
0
2 3 4 5 6 7 8 9 10 11
Output (calculators per day)
16
14
12
10
MC
8
6
ATC
AVC
2
0
AFC
1
2 3 4 5 6 7 8 9 10 11
Output (recordable DVDs per day)
MC =
DTC
DOutput
MC =
W
MPP
TR = TC
TR =100; TC= 100; TR=TC
TR=100; TC =50, P/L= TR-TC= 100-50= 50Profit
TR=100; TC=200, P/L =TR-TC = 100-200= (100)
Breakeven?
P200price shirt; P200,000(machine)); (80/hr labor)
TR= TC
(sp/u) (u)= TFC+TVC
200(x) = 200,000 + 80(x)
200x-80x = 200,000
120x = 200,000
X= 200,000/120
1,667 pairs will have to be sold to break even
< = profit; >=loss
End