The Production Function

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Presentation transcript:

The Production Function

Firm Behavior Firm’s have an economic goal to maximize profits Profits = Total Revenue – Total Cost Maximum Profits

Production Function Production function- the relationship between Qty of inputs and Qty of output Production Function Labor Capital Natural Resources Entrepreneurial Talent OUTPUT Known as Total Product

Measuring Output Marginal product - the increase in output that arises from one additional unit of input Gain 5 more computers Add 1 worker

Law of Diminishing Marginal Returns As you increase inputs—beyond some point----marginal product declines Example: As more and more workers are hired => each additional worker contributes less to production

Production Function Output. Inputs

Label these

The slope of the production function measures the marginal product of an input Quantity of output As marginal product declines, the production function becomes flatter Number of Workers Hired

Production Function TP AP MP

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