4/29/2017

The
Production
Function
1
 Short Run vs. Long Run
Plant size is
• The short run is defined as
the period of time when fixed, labor
the plant size is fixed. is variable
• The long run is defined as Both Plant
the time period necessary size and labor
to change the plant size.
are variable
Duration of the long/short
run depends on the
production process…
2
 Short Run vs. Long Run
Plant size is
Short Run fixed, labor
is variable
To increase
Short Run production firms
increase Labor
but can’t expand
their plant
Firms produce in the short run
3
 Short Run vs. Long Run
Plant size is
Long Run variable, labor is
variable
How can To increase
the plant
Long Run production firms
size be increase Labor
variable? andsize
expand
Plant is their
plant.in the
variable
Firms plan in the ‘planning’ 4

long run stage

 There are three important ways to
measure the productivity of labor:

• Total product (TP)

• Average product (AP)
• Marginal product (MP)

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Total Product: Match number of workers
(L) with TOTAL number of units of
output produced (TP) holding the plant
size constant.
More output can be produced with more
workers.
INCREASING FUNCTION.

Total Product
Total Product

Total Product

Labor Labor Labor

4/29/2017
 Units
produced If TP has aConstant
Constant Slope
25
+5
20
+5
15
+5 Each worker adds
10 the same amount
+5
5
+5 Number of Workers hired
0
1 2 3 4 5
If TP has a Constant Slope: Marginal
Product is the same for all workers

5
+5 +5 +5 +5 +5
1 2 3 4 5 Worker #
 Increasing Slope
75
25

50 ALL workers become

20 more productive as they
concentrate on doing
Each worker only
adds
one task
MORE than the
30
previous one
15
15
5 10
5
1 2 3 4 5
 Increasing Slope Each worker adds
more than the
Marginal previous one
Product

Increasing
Marginal
Product
25
20
15 25
10 20
5 15
5 10 Worker #

1 2 3 4 5
75 Decreasing Slope
Decreasing
5
70
60 10
15
45 ALL workers become LESS
productive as the plant
20 gets crowded and
equipment
Each workerbreaks
addsdown
LESS
25 than theoften
previous one

25

1 2 3 4 5
 Each worker adds
LESS than the
Marginal previous one
Product

Decreasing
25
20
15 25 Marginal
10 20 Product

5 15
10 5 Worker #

1 2 3 4 5
Q ALL THREE FUNCTIONS ARE INCREASING….
Q
Same size steps: MP same
Larger steps:
Constant Slope MP increase
Increasing Slope

L
As L increases, TP increase by L
the same amount As L increases, TP increase by
increasing amounts
Q Smaller steps: MP decrease
Decreasing Slope

As L increases, TP increase by
decreasing amounts
L
 Constant
TP

25
+5
20
+5
15
+5 5
10
+5 +5 +5 +5 +5
+5
5 1 2 3 4 5 Worker #

+5
0
1 2 3 4 5
 Increasing
75

25

50
20
25
30 20
15 15 25
10 20
15 15
10 5 10
5 5
5 Worker #

1 2 3 4 5 1 2 3 4 5
 Decreasing
75
5
70 Marginal
Product
10
60
15
45

20
25
20
25 15 25
10 20
25 15
5 10 5 Worker #

1 2 3 4 5
1 2 3 4 5
 Which of these three shapes
best describes what is common
to most production processes?

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 Crowded Plant:
125
Decreasing MP
5
120 10
110
15
95 Law of Diminishing
20
Returns to Labor
75
25

50
20 Specialization:
Increasing MP
30
15
15
10
5 5
1 3 5 7 9
2 4 6 8 10
 Increasing MP, Decreasing MP and Negative MP

125 -5
5
120 10 -10
110
15 -15
95
20

75
25

50 Negative
20 Returns to
30 Labor
15
15
10
5
+5
1 3 5 7 9
2 4 6 8 10 11 12
 MP: Slope of the Production Function
Q (units
produced)
MP = 30 Slope = 30/1 = 30

TP(Q)
160 units
30 units Rise DQ The 10th
worker adds
130 units 30 units to
Run DL production

1
L (Workers hired)
9 10
 MP INCREASES AND DECREASES WHILE
TOTAL PRODUCT STILL RISING
If more workers are added, MP turns NEGATIVE

MP
27
25 2 -4 MP = 12
23
5
20
MP = 8
MP = 5
12
8
MP = 2
8 5
1 2 3 4 5 1 2 3 4
1st 2nd 3rd 4th 5th
MP = -4
 Total Product vs. Marginal Product
Diminishing Returns to Labor set in after
worker 2
MP rises up
MP falls
to 2nd after to
TP rises up to TP falls after 4th MPworker 2nd
4th worker worker worker
27
25
23 MP = 12 MP becomes
negative after
4th worker
20 MP = 8
MP = 5
8
MP = 2
5
1 2 3 4 5 1 2 3 4
MP = -4
 THE TP AND MP
TP is
max
TP

Changes
concavity
L
MP
MP is max

L MP is
zero
MP 23
 Average Product (AP)
Output per worker

AP = Total Product / Labor

AP = TP/L

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 Output per worker
OUTPUT PER WORKER: AVERAGE PRODUCT (AP)
AP = Slope of Output per
ray = Q/L worker = 15
Q units
If 10 workers
produce 150 units,
TP
150 units

Q
AP = 150/10 = 15
Rise

Run
L L
10
 AP = Q/L
What happens
AP = Slope
to the of ray
AP as L from What
origin
happens
increases? to the slope as
Q L increases?
Q L AP
5 5 1.00
82 TP
80 20 10 2.00
70
30 12 2.50
70 16 4.38
30
80 20 4.00
20
82 23 3.57
5 L
5 10 12 16 20 23
27
 AP: Increases, reaches a maximum
and decreases.
AP AP Increases up AP Decreases Q L AP
to 16 workers after L=16 5 5 1.00
20 10 2.00
70/16 30 12 2.50
=4.38
70 16 4.38
80 20 4.00
82 23 3.57
L
L
16
28
 The Relationship between AP and
MP
• your
If aIf worker
MPnext
(70)adds
> AP (60),
grade then
70is>say the
per70 Average
> your
worker test
average
Product
average
before himincreases.
so far say
(60), 60,he
then then yourthe
makes testper
Average
worker increases.
• If MP (50) < AP (60),
average then the AP will
(AP) increase.
decrease.
If a
yourworker
nextadds
grade50is<sayper50
worker
< youraverage
test
• If MP = AP, then the AP will not increase or
before
average him
so (60), then
far say 60,he makes
then yourthe
testper
decrease: it is at the maximum point.
worker
Averageaverage (AP) decrease.
decreases.
your
If a nextadds
worker grade60is=60 = your
per test
worker average
average so (60),
before him far 60, then
then peryour test average
worker Average
staysstays
(AP) the same .
the same.
29
 THE AP AND MP…
TP is
max
TP
Slope of
ray is
max
Changes
DRT set in
concavity
L
MP, AP
MP
DRTisset
maxin
AP is max

AP
L MP is
zero
MP 30
 MP and AP
Suppose that 8 workers produce a total of 35 units
9 workers produce a total of 45 units
MP AP 10 Marginal product of 9th worker = 10

5 AP of 9 workers = 45/9=5
4.4 AP
AP of 8 workers = 35/8 = 4.4
MP

9
8 31
 MP and AP
Suppose that 12 workers produce a total of 71 units
13 workers produce a total of 76.9 units MP = 5.9
4/29/2017

MP AP
AP = MP=5.9
5.9
5.9 5.9
AP remains same

AP

MP

AP of 13 workers = 76.9/13 = 5.9 1213

AP of 12 workers = 71/12 = 5.9 32
Relationship between MP and AP
4/29/2017
MP = AP, AP doesn’t
MP AP 70 change and
AP is max

MP above AP

60

MP below AP AP

MP

33
 MARGINAL REVENUE PRODUCT
MRP = Revenue generated by last worker hired
MP = Units added to total product by last
worker hired.
MRP = MP * Price

The firm should hire all workers for whom the

revenue each generate exceeds his wage.

The firm should hire all workers for whom the

MRP > wage.
34
HOW MANY WORKERS SHOULD BE
HIRED?
Wage per worker per day = $200 Price per unit = $30
Workerone
Worker 5threeadds adds
315 10
L
L TP
TP MP
MP MRP
Worker adds units
units
units
to totooutput
output output
which which
whichbring
0
0
bring$450
bring $300 dollars
dollars in in
00 MP*Price
$90 dollars
additionalrevenue.
additional revenue. in
additional revenue.
1
1 15
15 15
15 450 This
This
isThis
additional
additional
islargeradditional
larger thanhis
than
revenue
revenue
hisrevenue
salary
salary
2
2 27
27 12
12 360 is smaller
($200)
($200)
salary
shouldhire
should
sosothe
($200)
hirethis
the
this
thanfirmhis
firm
soworker
worker
the firm
3
3 37
37 10
10 300 should NOT hire this
worker
4
4 44
44 77 210 Worker
Worker fourtwoadds adds7 units12
tounits
output to which
outputbring which
5
5 47
47 33 90 bring
$210$360dollarsdollars
in in

6
6 49
49 22 60 Whenadditional
additional
the wage revenue.
revenue.
is $200:
This
Thisadditional
Demand additional revenue
for workers revenueis 4
7
7 48
48 -1-1 -30 isislarger
largerthan
($200)
thanhis
($200)sosothe
hissalary
thefirm
salary
firm
8
8 45
45 -3-3 -90 should
shouldhire hirethis
thisworker
worker 35
BUILDING LABOR DEMAND
LINE
The firm should hire all workers for whom the MRP
greater than or equal to the wage.
L TP MP MRP The firm will
If wage is: hire _ workers
0 0 MP*Price
400
1 15 15 450
300
2 27 12 360
250
3 37 10 300
100
4 44 7 210
70
5 47 3 90
60
6 49 2 60
50
7 48 -1 -30
40
8 45 -3 -90 36
THE OPTIMAL USE OF Once diminishing
returns to labor set in
AN INPUT the MP decreases

L TP MP MRP When the MP

decreases, the MRP
0 0 MP*Price
also decreases

1 15 15 450 The firm should hire

2 27 12 360
more workers as long as
the MRP > wage
3 37 10 300 We know the firm has
hired the optimum
4 44 7 210 number of workers when
the MRP = wage
5 47 3 90
6 49 2 60
Rule: Increase use of an
input until
7 48 -1 -30 MPR of that input =
Price of the input
8 45 -3 -90 37
39
40

40
 MPL1
MPL2
No need to
change
MPL3
Labor/Capital
Mix

L1 L2 L3

As more workers are hired:

MP decrease
42
 MPL1 MPk1

MPL2 MPk2

MPL3 MPk3

L1 L2 L3 K1 K2 K3

As moreworkers are hired: As K increase: MP

MP decrease decrease

As K decrease: MP
As L decrease: MP
increase
increase

43