The Theory of Production Chapter 5 : Lesson 2 The Theory of Production

Essential Question: How do companies use the stages of production to determine the most profitable number of workers to hire?

Production Function: graphic portrayal showing how a change in the amount of a single variable input affects output

Total Product: total output or production by a firm

Marginal Product: extra output due to the addition of one more unit of input

Stages of Production: phases of production that consist of increasing, decreasing, and negative returns

Marginal Product Curve 14 Increasing marginal returns 12 Diminishing marginal returns Negative marginal returns 10 8 6 4 Garages per Year MPP in 2 –2 –4 MPP –6 1 2 3 4 5 6 7 Number of Carpenters

Law of Diminishing Returns SHORT-RUN PRODUCTION RELATIONSHIPS Law of Diminishing Returns Total Product Total Product, TP Increasing Marginal Returns Quantity of Labor Average Product, AP, and Marginal Product, MP Average Product Marginal Product Quantity of Labor

Law of Diminishing Returns SHORT-RUN PRODUCTION RELATIONSHIPS Law of Diminishing Returns Total Product Total Product, TP Diminishing Marginal Returns Quantity of Labor Average Product, AP, and Marginal Product, MP Average Product Marginal Product Quantity of Labor

Law of Diminishing Returns SHORT-RUN PRODUCTION RELATIONSHIPS Law of Diminishing Returns Total Product Total Product, TP Negative Marginal Returns Quantity of Labor Average Product, AP, and Marginal Product, MP Average Product Marginal Product Quantity of Labor

Diminishing Returns: stage of production where output increases at a decreasing rate as more units of the variable input are added

Short Run: production period so short that only variable inputs (usually labor) can be changed a period of time during which some of the firm’s cost commitments have not ended. In the short run, output can change but some resources are fixed. Generally, the fixed resources are plant size and capital.

Long Run: production period long enough to change amount of variable and fixed inputs used in production. a period of time long enough for all of the firm’s cost commitments to come to an end. In the long run, all inputs can be varied.

Total Product (TP) Marginal Product (MP) Average Product (AP) SHORT-RUN PRODUCTION RELATIONSHIPS Total Product (TP) Marginal Product (MP) Marginal Product = Change in Total Product Change in Labor Input Average Product (AP) Average Product = Total Product Units of Labor

Total Product for Al’s Building Company Find the Average Product at each level of output. Find the Marginal Product of each additional carpenter.

Al’s Product Schedule

Total Product with Different Quantities of Carpenters 40 F 35 TP E 32 G 30 25 D Garages per Year Total Output in 20 15 C 10 B 5 A 1 2 3 4 5 6 7 Quantity of Carpenters per Year

Review Question: Chapter 5 : Lesson 2 Read pages 136-139 and answer Review Questions on page 139. Hand in Google Class Room.