2. Productionslide 1 PRODUCTION PRODUCTION FUNCTION: The term economists use to describe the technology of production, i.e., the relationship between inputs and the output of a good or service.

3. Productionslide 2 There is a production function for every good that shows the maximum output you can get from any quantities of inputs. The production function is the description of the current best technology for making a good. Production functions apply to firms. E.g., MSU has a production function for producing alfalfa. GM has a production function for producing Chevy’s.

4. Productionslide 3 TOTAL PRODUCT CURVE The total product curve shows output as a function of a single variable input, holding all other inputs constant.

5. Productionslide 4 The production function for tax returns in a small accounting firm can be written like this: Q(returns) = f(office space, accountants, computers, furniture, supervisors, office supplies, etc.) The dependent variable is quantity of output (number of returns filed in this case). The independent variables are quantities of inputs.

6. Productionslide 5 Here’s a table of values for tax return production as a function of a single variable input, LABOR: Labor Total Product 00 13 215 336 448 556 662 766 868

7. Productionslide 6 Total product curve for tax returns as a function of the amount of labor 0 10 20 30 40 50 60 70 012345678910 Plot the remaining points Q LABOR Hidden slide

8. Productionslide 7 Total product curve for tax returns as a function of the amount of labor Q LABOR TP When labor is 5, output is 56 When labor is 5, output is 56

9. Productionslide 8 Marginal product of an input: The change in output per unit change in input. Marginal product is the slope of the total product curve:  Q/  L Marginal product is a measure of input productivity.

10. Labor Total Product Marginal Product 00 133 21512 33621 44812 556 662 766 868 (48-36)/ (4-3) (48-36)/ (4-3)

11. Productionslide 10 The marginal product curve shows the marginal product as a function of the quantity of labor used. The independent variable is the amount of the input (labor). The dependent variable is the marginal product of labor.

12. Productionslide 11 0 2 4 6 8 10 12 14 16 18 20 22 0246810 Hidden slide Plot the remaining points showing MP here, and connect them. Label the axes correctly.

13. Productionslide 12 0 2 4 6 8 10 12 14 16 18 20 22 0246810 Here’s the final result of graphing the MP curve. MP L LABOR MP The marginal product of the 6th unit of labor is 6.

14. Productionslide 13 Law of Diminishing Returns As the amount of an input increases, all other inputs being held constant, the marginal product of the input will eventually decline.

15. Productionslide 14 0 2 4 6 8 10 12 14 16 18 20 22 0246810 Total Product Curve Marginal Product Curve The Law of Diminishing Returns says the the total product curve eventually gets flatter as the amount of the variable input increases. 0 10 20 30 40 50 60 70 80 012345678910 Q TP L MP L