The Production Function

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Presentation transcript:

The Production Function Chapter 13

Firm Behavior Maximum Profits Firm’s have an economic goal to maximize profit Profit = Total Revenue – Total Costs Producing at unit elasticity only maximizes total revenue To maximize profit a firm must concentrate on costs of production If costs ↓ => Profit ↑

Total Product (output) Production Function Production Function- measures the relationship between Qty of inputs and Qty of output Production Function OUTPUT Inputs: Labor Capital (human & physical) Natural Resources Entrepreneurial Talent Known as Total Product (output)

Marginal Product (output) Marginal product - the increase in output that arises from one additional unit of input Gain 5 more computers Add 1 worker Goal is to ↑ productivity (efficiency) of workers Then costs ↓ => profit rises!

Law of Diminishing Marginal Product As firms add inputs—at some point----marginal product (MP) will begin to decline Example: As more and more workers are hired => eventually each additional worker contributes less output 10 MP = # T-Shirts per worker 20 30 20 16 8

The slope of the production function measures the marginal product of the next input Quantity of output Total Product = Total Output As marginal product declines, the production function becomes flatter Number of Workers Hired

Production Function Graph TP Once MP turns negative => TP begins to decline AP MP

Worksheet #1 Lesson 2, Activity 25 pg. 131

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