1. The Production Function
Chapter 13

2. Firm Behavior Maximum Profits
Firm’s have an economic goal to maximize profit
Profit = Total Revenue – Total Costs
Producing at unit elasticity only maximizes total revenue
To maximize profit a firm must concentrate on costs of production
If costs ↓ => Profit ↑

3. Total Product (output)
Production Function
Production Function- measures the relationship between Qty of inputs and Qty of output
Production
Function
OUTPUT
Inputs:
Labor
Capital (human & physical)
Natural Resources
Entrepreneurial Talent
Known as
Total Product (output)

4. Marginal Product (output)
Marginal product - the increase in output that arises from one additional unit of input
Gain 5 more
computers
Add 1 worker
Goal is to ↑ productivity (efficiency) of workers
Then costs ↓ => profit rises!

5. Law of Diminishing Marginal Product
As firms add inputs—at some point----marginal product (MP) will begin to decline
Example: As more and more workers are hired => eventually each additional worker contributes less output 10
MP = # T-Shirts per worker 20 30 20 16 8

6. The slope of the production function measures the
marginal product of the next input
Quantity of output
Total Product = Total Output
As marginal product declines,
the production function becomes flatter
Number of Workers Hired

7. Production Function GraphTP
Once MP turns negative =>
TP begins to decline AP MP

8. Worksheet #1
Lesson 2, Activity 25 pg. 131