This document summarizes key concepts from a lecture on short run production and output. It discusses average and marginal product curves, how they relate, and their shapes. It also defines different types of costs, and examines average cost and marginal cost curves. Finally, it discusses the short run shutdown point for firms and factors considered in the long run.
This document summarizes key concepts from a lecture on short run production and output. It discusses average and marginal product curves, how they relate, and their shapes. It also defines different types of costs, and examines average cost and marginal cost curves. Finally, it discusses the short run shutdown point for firms and factors considered in the long run.
This document summarizes key concepts from a lecture on short run production and output. It discusses average and marginal product curves, how they relate, and their shapes. It also defines different types of costs, and examines average cost and marginal cost curves. Finally, it discusses the short run shutdown point for firms and factors considered in the long run.
Decisions Lecture 5: Short Run Production and Output
1 MBA Business Economics Lecture 5, Dr Dawid Trzeciakiewicz
Average and Marginal Product 𝑂𝑢𝑡𝑝𝑢𝑡 • Define average product: Marginal 𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑡 Product Falls 𝐴𝑣𝑔 𝑃𝑟𝑜𝑑𝑢𝑐𝑡 = 𝑁𝑜 𝑜𝑓 𝑊𝑜𝑟𝑘𝑒𝑟𝑠 • Marginal product is the 𝐴𝑃 output produced by adding an extra worker • Appropriate law of diminishing marginal returns applies here – why? • Graph shows this average product (𝐴𝑃) curve 𝐿𝑎𝑏𝑜𝑢𝑟
2 MBA Business Economics Lecture 5, Dr Dawid Trzeciakiewicz
Average and Marginal Product 2 𝑂𝑢𝑡𝑝𝑢𝑡 • Because of the benefits of experience we may see an early increase in the marginal product, but this will soon fall. • Lines will always cross at the maximum point of AP • Why do the curves take this shape? 𝐴𝑃 • Are workers really as good and hard working as each 𝑀𝑃 other? 𝐿𝑎𝑏𝑜𝑢𝑟
3 MBA Business Economics Lecture 5, Dr Dawid Trzeciakiewicz
Definitions of Costs • Split costs under two headings, fixed and variable Fixed Variable • Construct “average” costs by •Factories •Commission dividing by the output •Machines •Power produced: •Land •Raw 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡𝑠 •Salaries materials 𝐴𝑇𝐶 = 𝑂𝑢𝑡𝑝𝑢𝑡 •Depreciation •Wages 𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠 •Packaging 𝐴𝐹𝐶 = •Display 𝑂𝑢𝑡𝑝𝑢𝑡 𝑇𝑜𝑡𝑎𝑙 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡𝑠 𝐴𝑉𝐶 = 𝑂𝑢𝑡𝑝𝑢𝑡
4 MBA Business Economics Lecture 5, Dr Dawid Trzeciakiewicz
Average Cost and Marginal Cost • Analogous to marginal 𝐶 𝑀𝐶 product and average product discussion • Marginal cost curve crosses 𝐴𝐶 through the average cost curve from below • Always crosses through at the lowest point (just as marginal product crosses through average product at the maximum)
5 MBA Business Economics Lecture 5, Dr Dawid Trzeciakiewicz
Short Run Shut Down Point • Firms can operate provided they are making a contribution to fixed costs, that is their revenues are greater than their variable costs. • Over the long term everything can be altered – firms can identify ways to make savings and make a greater contribution to fixed costs • If it is still not possible to cover the total costs in the long run then the business should shut down, this creates a long run shut down point • This discussion is integral to the supply curve discussion which follows in Lecture 6.
6 MBA Business Economics Lecture 5, Dr Dawid Trzeciakiewicz
Summary • Costs come from many sources, and may be fixed or variable with respect to output • Marginal product of labour can rise but as output increases it obeys an appropriate law of diminishing marginal returns • Marginal product crosses the average product at its maximum • Marginal cost crosses average cost at its minimum • Firms should aim to make contributions to their fixed costs, that is they should have higher average variable costs than their average revenue. • In the long term firms can look to change all of their processes and inputs to address the inability to repay fixed costs as well.
7 MBA Business Economics Lecture 5, Dr Dawid Trzeciakiewicz