1 Relationship of Marginal Product & Average Product Consider the Height of Students in a class Total Height = S 1 + S 2 + S 3 + S 4 + S 5 + S 6 + S 7 Average Height = Total Height / no of students Marginal Height ? S 1 = 5’ Average Height = 5’ S 2 = 5’6”>Average Height = 5’3” S 3 = 5’10”>Average Height = 5’5+” S 4 = 6’>Average Height = 5’7” S 5 = 5’8”>Average Height = 5’7+” S 6 = 5’4”<Average Height = 5’6+” S 7 = 5’2”<Average Height = 5’6”

2 The Long Run and the Short Run A long-run decision is a decision in which the firm can choose among all possible production techniques. In the long run, all inputs are variable. A short-run decision is one in which the firm is constrained in regard to what production decision it can make. In the short run, some inputs are fixed.

3 Production --Economies of Scale What is scale Plant size What is scope More than one product in a plant – interdependent production that reduces cost Diseconomies of Scale Technological Change

4 Production -- Costs Types of Cost Total Cost - Factor costs (prices) (TC) Wages Interest Rent Profit Fixed Cost – can not change – in short run only Variable – can change – all can change in long run Marginal – cost of next unit of output Average Total Cost TC/Q Average Fixed Cost FC/Q Average Variable Cost VC/Q

5 Fixed Costs, Variable Costs, and Total Costs Fixed costs are those that are spent and cannot be changed in the period of time under consideration. In the long run, there are no fixed costs since all inputs (and therefore their costs) are variable. In the short run, a number of inputs and their costs will be fixed.

6 Total Cost Curves FC Total cost $ Quantity of corn VC TC TC = VC + FC