1. Please read the following License Agreement before proceeding.
License Agreement for Use of Electronic Resources
The illustrations and photographs in this PowerPoint are protected by copyright. Permission to use these materials is strictly limited to educational purposes associated with the course for which you have adopted Krugman’s Economics for AP®, Second Edition.
You may project these materials in lectures, post them on password-protected course websites, include them in course documents, or use them in any other manner that is consistent with their intended use as materials to aid in the teaching of the course for which you have purchased Krugman’s Economics for AP®, Second Edition. The following restrictions apply to materials posted on course websites:
The website must be available only to students taking the course for which you have adopted our program or to registered users of your institution’s network. They may not be posted on sites accessible to the general public outside your institution. Please note that this restriction is an IMPORTANT PROTECTION FOR YOU: Copyright holders will seek (and have sought) legal action if you post copyrighted photographs or other materials to open-access sites.
If requested, you must provide BFW/Worth Publishers with the URL and password required to access the site.
The name of the copyright holder (BFW/Worth Publishers, unless otherwise indicated) must appear with each item at all times. Note: Most of the photos herein are owned by other parties/individuals. The copyright holder is listed with the image.
You may not post materials other than in the context of course material for the course for which you have adopted our program.
You may not distribute these materials to others not associated with the course for which you have adopted our program. Nor may you use any of the materials in any context other than the teaching of this course, without first receiving written permission from the copyright holder (BFW/Worth Publishers, unless otherwise indicated).
In using these PowerPoint slides, you agree to accept responsibility for protecting the copyrights to the materials contained herein.
If you have any questions regarding permitted uses of these materials, please contact:
Permissions Manager BFW/Worth Publishers 33 Irving Place, 10th Floor New York, NY

2. KRUGMAN’S
Economics
for AP®
S E C O N D E D I T I O N

3. Section 10
Module 54

4. What You Will Learn in this Module
Discuss the importance of the firm’s production function, the relationship between quantity of inputs and quantity of output
Explain why production is often subject to diminishing returns to inputs
What You Will Learn in this Module
Section 10 | Module 54

5. The Production Function
A production function is the relationship between the quantity of inputs a firm uses and the quantity of output it produces.
A fixed input is an input whose quantity is fixed for a period of time and cannot be varied.
A variable input is an input whose quantity the firm can vary at any time.
Section 10 | Module 54

6. Inputs and Output
The long run is the time period in which all inputs can be varied.
The short run is the time period in which at least one input is fixed.
The total product curve shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input.
Section 10 | Module 54

7. Production Function and Total Product Curve for George and Martha’s Farm
Section 10 | Module 54

8. Marginal Product of Labor
The marginal product of an input is the additional quantity of output that is produced by using one more unit of that input.
Section 10 | Module 54

9. Diminishing Returns to an Input
There are diminishing returns to an input when an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input.
The following marginal product of labor curve illustrates this concept clearly.
Section 10 | Module 54

10. Marginal Product of Labor Curve
Section 10 | Module 54

11. Total Product, Marginal Product, and the Fixed Input
Section 10 | Module 54

12. F Y I
Was Malthus Right?
In 1798, Thomas Malthus authored the book An Essay of the Principle of Population which introduced the concept of diminishing returns to an input.
Malthus argued that as a country’s population grew, but its land area remained fixed, it would become increasingly difficult to grow enough food.
Over the long term, Malthus’s predictions have turned out to be wrong due to technological progress.
Section 10 | Module 54

13. Summary
The cost of using a resource for a particular activity is the opportunity cost of that resource.
Some opportunity costs are explicit costs; they involve a direct payment of cash.
Other opportunity costs, however, are implicit costs; they involve no outlay of money but represent the inflows of cash that are forgone.
Companies use capital and their owners’ time. So companies should base decisions on economic profit, which takes into account implicit costs such as the opportunity cost of the owners’ time and the implicit cost of capital.
A normal profit is the amount needed to keep resources employed in the business – to keep the business in business.
Section 10 | Module 54