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PRODUCTION

RECALL THAT

Total Product- total output of a particular good or service produced by a firm Marginal Product- additional output produced for every one additional unit of input employed (say, labor). Average Product- ratio of output to input

 Law of Diminishing Returns. Marginal product that can be attributed to each additional unit of variable resource will decline.as successive units of variable resource are added to fixed resource. .

STAGES OF PRODUCTION .

SHORT RUN COSTS  TC= TFC+TVC AFC= TFC/Q  AVC= TVC/ Q  ATC= AFC+AVC   MC= ∆TC/∆Q .

25 86.33 100 80 70 60 5 6 7 8 9 10 100 100 100 100 100 100 370 450 540 650 780 930 470 550 640 750 880 1030 20 16.00 94 91.67 14.14 81.00 80.67 93.75 97.00 190 90 2 3 4 100 100 100 170 240 300 270 340 400 50 33.11 10.33 25 85.43 93.00 75.29 12.00 135 113.00 74.00 70 80 90 110 130 150 .50 11.00 77.67 91.TP/ Q 0 1 TFC 100 100 TVC 0 90 TC 100 190 AFC AVC ATC MC 100 90.00 75.78 103.

 As the total number of goods produced increases. . the average fixed cost decreases because the same amount of fixed costs is being spread over a larger number of units of output.

reaches a minimum. . As added input increases. and then increases again. AVC declines initially.

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cost of producing more unit of output. or additional. MC= change in TC/ change in Q  . MARGINAL COST= is the extra .

 Marginal cost designates all the cost incurred in producing the last unit of output. .

MP AND MC RELATIONSHIP .

 Changes in either resource prices will cause costs to change and cost curves to shift. .

SAMPLE EXERCISES Input 0 1 2 3 4 TP 0 15 34 51 65 Marginal Product Average product 5 6 7 8 74 80 83 82 .

A FIRM HAS FIXED COSTS OF P60.00 AND VARIABLE COSTS AS INDICATED IN THE TABLE BELOW. TP 0 1 2 3 4 5 6 7 8 TFC TVC 0 45 85 120 150 185 225 270 325 TC AFC AVC ATC MC 9 10 390 465 .

all factors of production are variable. .LONG RUN COSTS  In the long run..

 Q=f (L.K) .

. The length of the long run differs from industry to industry depending upon the nature of production.

 The long-run ATC curve is generally U-shaped. .

and it represents the various plant sizes a firm can construct in the long run. . The long run ATC curve is composed of segments of SR ATC curves.

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reductions in the average total cost of producing a product as the firm expands the size of plant . Economies of scale.

the ability to use of labor and management.  Greater specialization in the use of labor and management. and the spreading of start-up costs among more units of output all contribute to economies of scale. Economies of scale are first encountered as a small firm expands. .

 As the firm continues to grow. it encounter diseconomies of scale stemming from managerial complexities that accompany large-scale production. .

 How the output of a business responds to a change in factor inputs is called returns to scale It refers to changes in output resulting from a proportional change in all inputs (where all inputs increase by a constant factor).  .

Increasing returns to scale occur if output increases by more than that proportional change  Decreasing returns to scale occur if output increases by less than that proportional change  Constant returns to scale occur if output increases by that same proportional change then there are  .

. there could be increasing returns at relatively low output levels. decreasing returns at relatively high output levels.  Typically. and constant returns at one output level between those ranges. A firm's production function could exhibit different types of returns to scale in different ranges of output.

Good 1 Q1 10 20 30 Cost 50 100 150 Good 2 Q2 10 20 30 Cost 60 100 130 Q1 10 20 30 Both Q2 10 20 30 Cost 100 180 250 .

Do the two goods indicate economies of scope? Why? . Does Good 1 indicate economies of scale? Why? B. Does Good 2 indicate economies of scale?Why?   C. A.