1. University of Hawai‘i at Mānoa Department of Economics
ECON 130 (003): Principles of Economics (Micro)
Gerard Russo
Lecture #15
Tuesday, March 2, 2004

2. LECTURE 15 Production Theory Three Stages of Production Total Product
Average Product
Marginal Product
Three Stages of Production
Stage I
Stage II
Stage III

3. Theory of the Firm π = TR – TC Profit = Revenue – Cost
Profit = Total Revenue - Total Cost
π = TR – TC
Costs are determined by:
Production technology
Input prices

4. Production: Q = f( K, L, M, E )
Output, Q, is determined by:
K: Capital
L: Labor
M: Material
E: Energy
Example: Automobile Manufacturing

5. Short-Run Production Function Q=f( L ).
MPL= 0
f( L ) = Q = TP L

6. Mathematical Aside: A Ray from the origin.
Linear function: y = a + bx
slope = ∆y/∆x = b; Marginal
y/x = a/x + b; Average
Special Case: y = bx
A ray emanating from the origin
y/x = b; Average

7. Short-Run Production Function Q=f( L ).
Average Product of Labor
is Maximized here. R4 Q R3 Q4 R2
f( L ) R1 Q3 Q2 Q1 L L1 L2 L3 L4

8. Short-Run Production Function Q=f( L ).V • R2 R•
f( L ) R1 N• •Z •T L

9. Production Function Q=f(L).
APL is maximized
TP is maximized
MPL= 0 Q • •
f( L ) = TP •
MPL is maximized L L0 L1 L2

10. Production Data
Labor:L
Output:Q
AP L= Q/L
MPL=∆Q/∆L - 1 2 3
1.5 6
2.0

11. Derivation of the AP Curve and MP Curve From the TP CurveQ • •
Total Product=TP • L
Q/L
Average Product of Labor=APL L
Marginal Product of Labor=MPL

12. THREE STAGES OF SHORT-RUN PRODUCTIONQ
STAGE II • •
STAGE I TP
STAGE III • L
Q/L
APL L L0 L1 L2
MPL