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- as successive units of variable resource are added to fixed resource. Marginal product that can be attributed to each additional unit of variable resource will decline.
Stages of production
SHORT RUN COSTS TC= TFC+TVC AFC= TFC/Q AVC= TVC/ Q ATC= AFC+AVC MC= ∆TC/∆Q
TP/ Q TFC TVC TC AFC AVC ATC MC 100 1 90 190 90.00 2 170 270 50 85.00 135 80 3 240 340 33.33 80.00 113.33 70 4 300 400 25 75.00 60 5 370 470 20 74.00 94 6 450 550 16.67 91.67 7 540 640 14.29 77.14 91.43 8 650 750 12.50 81.25 93.75 110 9 780 880 11.11 86.67 97.78 130 10 930 1030 10.00 93.00 103.00 150
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.
As added input increases, AVC declines initially, reaches a minimum, and then increases again.
MARGINAL COST= is the extra , or additional, cost of producing more unit of output. MC= change in TC/ change in Q
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 TP Marginal Product Average product 1 15 2 34 3 1 15 2 34 3 51 4 65 5 74 6 80 7 83 8 82
A firm has Fixed costs of P60 A firm has Fixed costs of P60.00 and variable costs as indicated in the table below. TP TFC TVC TC AFC AVC ATC MC 1 45 2 85 3 120 4 150 5 185 6 225 7 270 8 325 9 390 10 465
Long RUN COSTS In the long run, all factors of production are variable..
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.
The long run ATC curve is composed of segments of SR ATC curves, and it represents the various plant sizes a firm can construct in the long run.
Economies of scale- reductions in the average total cost of producing a product as the firm expands the size of plant Plant- a physical establishment that performs one or more functions in the production, fabrication, and distribution of goods and services. Firm- an organization that employes resources to produce a good or service for profit and owns and operates one or more plants.
Economies of scale are first encountered as a small firm expands. Greater specialization in the use of labor and management, the ability to use of labor and management, and the spreading of start-up costs among more units of output all contribute to economies of scale.
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
A firm's production function could exhibit different types of returns to scale in different ranges of output. Typically, there could be increasing returns at relatively low output levels, decreasing returns at relatively high output levels, and constant returns at one output level between those ranges.
Q1 Cost Q2 10 50 60 100 20 180 30 150 130 250 Good 1 Good 2 Both
A. Does Good 1 indicate economies of scale? Why? B. Does Good 2 indicate economies of scale?Why? C. Do the two goods indicate economies of scope? Why? 'economies of scope' refers to lowering average cost for a firm in producing two or more products