251 FINA Chapter Seven Production Dr. Heitham Al-Hajieh

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Presentation transcript:

251 FINA Chapter Seven Production Dr. Heitham Al-Hajieh

Production The total amount of output produced by a firm is a function of the levels of input usage by the firm Total Physical Product (TPP) function - a short-run relationship between the amount of labor and the level of output, ceteris paribus.

Total physical product (TPP)

Law of diminishing returns as the level of a variable input rises in a production process in which other inputs are fixed, output ultimately increases by progressively smaller increments.

Average physical product (APP) APP = TPP / amount of input

Marginal physical product (MPP) the additional output that results from the use of an additional unit of a variable input, holding other inputs constant measured as the ratio of the change in output (TPP) to the change in the quantity of labor (or other input) used

Computation of MPP and APP Note that the MPP is positive when an increase in labor results in an increase in output; a negative MPP occurs when output falls when additional labor is used.

TPP

Shape of MPP curve MPP rises when TPP increases at an increasing rate, and declines when TPP increases at a decreasing rate. MPP is negative if TPP declines when labor use rises

Relationship of APP and MPP APP rises when MPP > APP APP falls when MPP < APP APP is maximized when MPP = APP