1. Lectures 12 - 18 Section Four: The Firm’s Supply Introduction to Microeconomics (L11100)

2. Section Outline 4.1Short Run Production (Lecture 12) 4.2Short Run Costs (Lecture 13) 4.3Short Run Supply Curve (Lecture 14) 4.4Long Run Production (Lecture 15) 4.5Optimisation of Factor Use and Long- run Costs (Lecture 16) 4.6Markets (Lecture 17)

3. 4.1 Short Run Production 4.1.1Production Defined 4.1.2The Relationship between Output and Inputs 4.1.3Production in Diagrams

4. Application “Why Nissan Chose to Stay in the UK” BBC website 24 th September 2004 Nissan decide to produce its people carrier (the Tone) in Sunderland despite threats to go to mainland Europe Labour costs and working hours mattered "If you look at the figures.. it makes more sense to build on your existing base because you have existing investments, you have less fixed costs and you have more flexibility than if you develop a new plant from scratch.” Louis Schweitzer, chief executive of Renault. Scenic – added a third shift "Which meant no investment, no fixed costs, no extra white collars - only extra blue collars, and 50% additional capacity, which for two lines producing 60 cars per hour is equivalent to a (new) plant” (ditto)

5. 4.1.1 Defining Production Simple description: Inputs are combined to produce outputs Combination is called a PRODUCTION FUNCTION, a general form example of which is: Q = f (land, labour, capital, entrepreneur etc)

6. Short Run - most factors are fixed, one varies Very Long Run - technology changes as well Long Run - all factors vary, technology is unchanged CETERIS PARIBUS (“all other things equal”) in short run:

7. An orchard owner produces apples. Without labour, output is zero. Workers are then hired. WorkerBoxes of Apples 1 2 3 4 5 10 22 29 33 30 4.1.2The Relationship between Output and Inputs

8. Q L 12 345 X X X X X 10 22 29 33

9. Illustrates the LAW OF DIMINISHING MARGINAL RETURNS (Important - short run only) “When successive increases in a variable factor are added to a fixed quantity of another factor the resulting additions to output will eventually fall” Same for all variable factors, not just labour e.g. fertilisers

10. Let us now call total output TOTAL PRODUCT Average Product: output per worker or TP/L Marginal Product: addition to output from last worker employed or 4.1.3Production in Diagrams

11. Q L TP Q1Q2 Q1 AP MP Q L Q3

12. Shape of these curves determined by the Law of Diminishing Marginal Returns However, position is set by level of fixed input Interim Summary 1. Production shows the relationship between inputs and outputs 2. Articulated via the production function 3. In the short run the Law of Diminishing Marginal Returns determines the shape of product curves (TP, AP, MP)