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# 12/10/2012

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## Chapter 9: Production and Cost Analysis I

A PLANT
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Is

the factory (space) where production takes place and All the equipment necessary to produce The plant includes everything needed to produce, except workers and raw materials.
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## SHORT RUN VS. LONG RUN

The short run is defined as the period of time when the plant size is fixed. The long run is defined as the time period necessary to change the plant size. Duration of the long/short run depends on the production process

Plant size is fixed, labor is variable Both Plant size and labor are variable
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## SHORT RUN VS. LONG RUN

Plant size is Short Run fixed, labor is variable To increase Short Run production firms increase Labor but cant expand their plant 4 Firms produce in the short run

## 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? and expand their plant. 5 Firms plan in the long run

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Total

## TOTAL PRODUCT FUNCTION (TP)

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Represents

the relationship between the number of workers (L) and the TOTAL number of units of output produced (Q) holding all other factors of production (the plant size) constant.
For a coffee shop, output would be measured in number of coffee cups a day For a steel mill, output would be measured in tons of steel produced a day

## BUILDING A TOTAL PRODUCT GRAPH

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The Total Product Curve must show that: 1. The more workers are hired the more output would be produced.

INCREASING FUNCTION.
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## Number of units of output produced

Constant Slope

25

20
15

5 5 5

10 5

5
5 0 1
Number of Workers hired

75 25 50
20

Increasing Slope

30
15 15 5
5

ALL workers become more productive as they concentrate on doing only one task

10

75 70 60 45

10 15

Decreasing Slope
ALL workers become LESS productive as the plant gets crowded and equipment breaks down often

20
25 25

Increasing
5 10 15

Decreasing

20

75
25

50
20

30 15 5 1
15 10 5

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## Positive Increasing, Positive Decreasing and Negative Slope

125 120 110 95
20 5 10 15

-5

-10 -15

75
25

50
20

30 15 5
15 10

5
2

10 11 12

ALL THREE FUNCTIONS ARE INCREASING. Q Same size steps Larger steps Constant Slope Increasing Slope

## L As L increases, Q increases by increasing amounts Smaller steps

Decreasing Slope
As L increases, Q increases by decreasing amounts L

## WHICH OF THESE THREE SHAPES

BEST DESCRIBES WHAT IS COMMON TO MOST PRODUCTION PROCESSES?
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In other words: Does each additional worker add the SAME? MORE? Or LESS to output that the previous worker?

## FOR MOST PRODUCTION PROCESSES

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the short run, the plant size is fixed. Adding more workers is favorable to production at first, as specialization increases productivity. Eventually, adding more and more workers to a FIXED PLANT size results in decreases in productivity due to crowded conditions:

Workers will have to SHARE EXISTING EQUIPMENT Equipment will break down more often.

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As more of a variable input (labor) is added to a fixed input (plant), additions to output eventually slow down.

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## THE LAW OF DIMINISHING MARGINAL PRODUCT.

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If more of the variable input (labor) continues to be added to a fixed input (plant), additions to output continue to decline until eventually output decreases

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## CHOOSING THE SLOPE:

2. For most productions processes as we add more workers, additions to output increase at the beginning but eventually decrease (could become negative). For this, we combine the graph with increasing steps (slope) and the graph with decreasing steps The most common production function has an increasing slope at the beginning, and eventually decreasing slope which may become negative
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## MARGINAL PRODUCT (MP)

The additional output that can be produced by adding one more worker while holding plant size constant. MP = DQ/DL Is the slope of the Total Product Function

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## MP: SLOPE OF THE PRODUCTION FUNCTION

Q (units
produced)

MP = 30
30 units Rise DQ

Slope = 30/1 = 30
TP(Q)
The 10th worker adds 30 units to production

## 160 units 130 units

Run DL

10

L (Workers hired)

Q

MP = 10
TP

160 units

30
130 units

Rise
Run

3
9 12

## MP INCREASES AND DECREASES WHILE TOTAL PRODUCT STILL RISING

If more workers are added, MP turns NEGATIVE

MP
25 27 23 2 -4

MP = 12 MP = 8

20

5 12
MP = 5

8
1 2 3 4 5 1st 2nd 3rd 4th 5th
1 2 3

MP = 2
5 4

MP = -4

## TOTAL PRODUCT VS. MARGINAL PRODUCT

MP
27 25 23

MP = 12

20

MP = 8 MP = 5 MP = 2
1 2 3 4 5

MP = -4

## TOTAL PRODUCT VS. MARGINAL PRODUCT

TP rises up to 4th worker 27 25 23 MP rises up to 2nd worker MP MP falls after to 2nd worker MP becomes negative after 4th worker

## TP falls after 4th worker

MP = 12

20

MP = 8 MP = 5 MP = 2
1 2 3 4 5

MP = -4

L 0 1 2 3 4 5

MP 5 10 15 20 25

L 0 1 2 3 4 5

MP

## Q 0 60 115 165 210 250

6 30 7 35 8 40 9 45 10this table: 50 given In youre the Product and 11 Marginal 55 you must use it to calculate Product. 12 the Total 60

6 285 7 315 8 340 9 360 10In this table: youre given 375 the 11 Total Product and you 385 must use it to calculate the 12 Marginal Product. 390

## AVERAGE PRODUCT (AP)

Represents the amount of output produced by each worker on average. Or Output per worker.

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## OUTPUT PER WORKER

Slope of that ray= Q/L = AP Q

## Output per worker = 15 units TP

150 units
If we draw a line (a ray) from the origin to a point on the production function

Rise Q

AP = Q/L AP = 150/10 = 15

Run L

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AP = Q/L What happens to RAY L AP = SLOPE OFthe AP asFROM ORIGIN What happens
increases?

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30

20
5

1012 16 20 23

## AP: INCREASES, REACHES A MAXIMUM AND DECREASES.

AP AP Increases up to 16 workers
70/16 =4.38

30

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## THE RELATIONSHIP BETWEEN AP AND MP

THE AP AND MP
TP Slope of ray is max

## Changes concavity L MP is max AP is max AP

MP,AP

MP

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MP AND AP
Suppose that 8 workers produce a total of 35 units
So when the 9th worker is hired 9 workers produce a total of 45 units

MP AP

5
4.4
MP
AP

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

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MP AND AP
Suppose that 12 workers produce a total of 71 units
So when the 13th worker is hired 13 workers produce a total of 76.9 units

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5.9

AP remains same

AP

MP

70
MP AP

70
MP above AP

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60

60
MP below AP AP

MP
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## CONSIDER A SMALL SANDWICH SHOP

# workers # sandwiches
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L 0 1 2 2.5 3 4 5 6 7 8 9

Q 0 10 25 31.3 35 40 42 42 35 25 10

MP
10 15 12.5 10 5 2 0 -7 -10 -15

AP
10.0 12.5 12.5 11.7 10.0 8.4 7.0 5.0 3.1 1.1

MP= previous AP

AP doesnt change

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L 0

MP

AP

L 0 1 2 3 4 5 6 7 8

MP

## Q 0 60 115 165 210 250 285 315 340

AP

1 2 3 4 5 6 7 8 9 10 11 12

5 10 15 20 25 30 35 40 45 In this table: youre given 50 the Marginal Product and you must use it to calculate 55 the Total Product. 60

9
10 11

360
375 385

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390

## Questions to practice for the test

L 0 10 20 30 40 50 Q 5 25 70 110 135 MP AP L 0 10 20 30 40 50 MP 5 20 45 40 25
Here you have the Marginal Product MP and you must calculate the Total Product and AP

AP

Here you have the Total Product Q and you must calculate the MP and AP

60 70
80

153 118
38
Table 1

60 18 70 -35
80 -80

Table 2

## Questions to practice for the test

L 0 10 20 30 40 50 60 70 80 Q MP AP L MP 0 10 5 20 20 30 45 40 40 50 25 60 18 70 -35 80 -80 Q AP

Table 1

Table 2

## Questions to practice for the test

L 0 1 2 3 4 5 6 7 8 Q MP AP L 0 1 2 3 4 5 6 7 8 MP Q AP

## 5 25 70 110 135 153 118 38

Table 1

5 20 45 40 25 18 -35 -80
Table 2

L
0 10 20 30 40

Q
0 5 25 70 110

DQ
5 20 45 40

DL
10 10 10 10

MP
0.5 2 4.5 4

50
60 70 80

135
153 118 38

25
18 -35 -80

10
10 10 10

2.5
1.8 -3.5 -8

DQ

DL

MP

MP *10

0 10 20 30 40
50 60 70 80

0 5 25 70 110
135 153 118 38

0 5 20 45 40
25 18 -35 -80

10 10 10 10
10 10 10 10

0.5 2 4.5 4
2.5 1.8 -3.5 -8

5 20 45 40
25 18 -35 -80

5 25 70 110
135 153 118 38

## Questions to practice for the test

For each table in the next slides answer the following questions: 1. What is the shape of the Total Product Curve? Should be able to draw the total product curve. 2. What is the shape of the Marginal Product Curve? Should be able to draw the Marginal Product Curve. 3. What is the shape of the Average Product Curve? Should be able to draw the Average Product Curve. 4. With which worker(s) do we realize increasing/decreasing/negative marginal productivity? How do you know? 5. Would you employ the 6th worker? Why yes/why not? 6. How are the marginal product and the average product related?

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MP 5 5 5

TP(Q)

AP

0
1 2 3

4
5 6 7

5
5 5 5

8
9 10 11

5
5 5 5
44

12

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MP 5 10 15

TP (Q)

AP

0
1 2 3

4
5 6 7

20
25 30 35

8
9 10 11

40
45 50 55
45

12

60

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MP 60 55 50

TP (Q)

AP

0
1 2 3

4
5 6 7

45
40 35 30

8
9 10 11

25
20 15 10
46

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## FILL IN THE TP AND AP SHOULD BE ABLE TO DRAW THESE GRAPHS.

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MP 5 10 15

TP(Q)

AP

0
1 2 3

4
5 6 7

20
17 15 13

8
9 10 11

12
10 8 6
47

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MP=AP MP AP AP MP MP

MP

AP

MP

AP

AP

AP
G MP

MP

MP

II

MP

III

MP

MP

IV