Short-run & long-run increases in output Short run Input 1Input 2Output 31 25 32 45 33 60 34 70 35 75 Long run Input 1Input 2Output 11 15 22 35 33 60 44.

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Presentation transcript:

Short-run & long-run increases in output Short run Input 1Input 2Output Long run Input 1Input 2Output Diminishing returns to variable factor Increasing returns to scale MPP Increase

Introductory Economic Lecture 14

Recap

The ‘scale’ of Production And ‘return’ to scale

The Location decision

Industry size And ‘External’ Economics of scale

The Optimum Combination of Factors: The marginal Product Approach

PLPL PKPK MPP L MPP K ≠ if It would be possible to reduce cost per unit of output by using a different combination of labor and capital EXAMPLE PLPL PKPK MPP L MPP K > if More labor should be used relative to capital, since the firm is getting a greater physical return for its money from using extra workers than it is getting from using extra capital. However as more and more labor is used, diminishing returns to labor set in. Thus MPP L will fall. Likewise, as less capital is used, MPP K will rise. Until PLPL PKPK MPP L MPP K = Technical or productive efficiency point

PaPa PbPb MPP a = MPP b PcPc PnPn MPP c = MPP n = Where a... n are different factors of production Multi factor case

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