Learning Objectives: Production Decisions and Costs in the Short Run LO1: Understand how and why economists measure costs differently from accountants and distinguish between the accountants’ and economists’ views of profits LO2: Understand the crucial relationship between productivity and costs CHAPTER 6 6-1© 2012 McGraw-Hill Ryerson Limited

Theory of Production 6-2© 2012 McGraw-Hill Ryerson Limited LO2 Short Run any period of time in which at least one input in the production process is fixed Total Product the total output of any productive process

Theory of Production 6-3© 2012 McGraw-Hill Ryerson Limited LO2 Marginal Product the increase in total product as a result of adding one more unit of input Average Product total product (or total output) divided by the quantity of inputs used to produce that total

Theory of Production 6-4© 2012 McGraw-Hill Ryerson Limited LO2 Marginal and Average Product Units of Labour TPMPAP 00—— –513

Theory of Production Law of Diminishing Returns as more of a variable input is added to a fixed input in the production process, the resulting increase in output will, at some point, begin to diminish. Division of Labour Dividing the production process into a series of specialized tasks, each done by a different worker 6-5© 2012 McGraw-Hill Ryerson Limited LO2

Benefits of Division of Labour 1.ability to fit the best person to the right job 2.increased dexterity achieved when one worker focuses on a single operation 3.time savings from not having to change tools 4.time savings gained by not moving from one operation to another 5.machine specialization can be developed around specific, discrete operations 6-6© 2012 McGraw-Hill Ryerson Limited LO2

6-7© 2012 McGraw-Hill Ryerson Limited LO2 Average product will rise if marginal product exceeds it and will fall if marginal product is less than it.

Self-Test 6-8© 2012 McGraw-Hill Ryerson Limited Calculate the MPL and the APL for each unit of labour used. LO2 Quantity of Labour Total Output MP L AP L