1. Warm-Up Imagine that you’re a farmer…
What happens to the size of your harvest if you add 1 worker to your payroll?
What might happen if you added 1000 workers?

2. The Production Function
Chapter 12: Behind the Supply Curve (pages )

3. Production Function
Shows relationship b/w firm’s inputs and output

4. Types of Inputs 2 different types… Short Run Long run
Fixed – Cannot D in short-run
Variable – Can D in short-run
Short Run
Long run
1 is fixed
All are variable

5. Fixed or Variable?
Variable
Fixed

6. Total Product
Total amount produced by firm

7. Marginal Product Slope of TP Curve Quantity of Labor Quantity of Wheat
MPL 1 19 2 36 17 3 51 15 4 64 13 5 75 11

8. Marginal Product

9. What’s the MPL? Quantity of Labor Quantity of Output MPL 1 19 2 36 171 19 2 36 17 3 51 15 4 64 13 5 75 11 6 84 9 7 91 8 96

10. TC = FC + VC Types of Costs Similar to inputs Creates TOTAL COST CURVE
Fixed – Same in short run
Variable – Change in short run
Creates TOTAL COST CURVE
TC = FC + VC

11. Total Costs (TC)

12. TC Curve

13. Marginal Cost (MC)
Slope of the TC Curve

14. Average Total Cost Composed of: ATC = AFC + AVC
Average Fixed Costs (TFC/Q)
Average Variable Costs (TVC/Q)
ATC = AFC + AVC

15. ATC

16. All Together Now …

17. Why U-Shaped?

18. Here’s Real Life …

19. Alicia’s Apple Pies is a roadside business.
Fixed costs = $9.00 per day
Variable costs = $1.00 for first pie, 50% more than previous pie for subsequent ones (e.g., 2nd pie costs $1.00 X 1.5 = $1.50)
Calculate Alicia’s MC, VC, ATC, AVC, AFC as pie output rises from 0 to 6 pies (VC = MC of first pie, plus MC of second pie)
Indicate the range of pies where the spreading effect dominates; where the diminishing returns effect dominates.
What is Alicia’s minimum-cost output? Explain why making one more pie lowers Alicia’s ATC when output is lower than the minimum-cost output. Explain why making one more pie raises Alicia’s ATC when output is greater than the minimum-cost output.