Download - Production Drives Supply
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Production Drives Supply Factors of Production Total Product, Average Product &
Marginal Product Short Run vs. Long Run Scale of Production & Returns to Scale
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Warm-Up Questions1. What is a “factor of production”?2. What are the 4 factors of production,
and what does each represent? 3. In a free market economy, who owns
most of the factors of production?4. Why do people get involved in
production? In other words, what is their incentive?
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The Critical Question
How does a firm decide how much of each of the various
inputs to buy?
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The Critical Answer
The combination of inputs that enables it to produce whatever
output it decides upon at minimum cost, and, therefore,
maximum profitability.
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Input vs. OutputOutput Inputs
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How to Measure Production use units instead of dollars (b/c prices
change over time) total product (TP): all units of a product
produced in a given period of time average product (AP): # units of output
produced per unit of input
units of outputAP =
units of input
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How to Measure Production cont… marginal product (MP): amount that
TP ↑ or ↓ as a result of adding 1 more unit of input important for deciding whether or not to
add the input … add if $ value of added output > cost of added input
outputMP
input
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Florence Farmer’s Poultry: TP
Flo’s Total Product Schedule
Corn Input (40-lb. bags)
Chicken Output (lbs.)
0 0.0
1 14.0
2 36.0
3 66.0
4 100.0
5 130.0
6 156.0
7 175.0
8 184.0
9 185.4
10 180.0
11 165.0
12 144.0
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Florence Farmer’s Poultry: TP
020406080
100120140160180200
0 1 2 3 4 5 6 7 8 9 101112
Total Product
Quantity of Corn (bags per week)
Tota
l O
utp
ut
(pou
nd
s of
ch
icken
per
week)
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Florence Farmer’s Poultry: AP
AP = 100 lbs. of chicken = 25 lbs. per bag
4 bags of corn
units of outputAP =
units of input
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Florence Farmer’s Poultry: AP
Flo’s Total Product & Average Product Schedule
Corn Input (40-lb. bags)
Chicken Output (lbs.) Average Product (lbs. per bag)
0 0.0 ---
1 14.0 14.0
2 36.0 18.0
3 66.0 22.0
4 100.0 25.0
5 130.0 26.0
6 156.0 26.0
7 175.0 25.0
8 184.0 23.0
9 185.4 20.6
10 180.0 18.0
11 165.0 15.0
12 144.0 12.0
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Florence Farmer’s Poultry: MP
MP = 100 – 66 lbs. of chicken = 34 = 34 lbs. per bag
4 – 3 bags of corn 1
outputMP
input
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Florence Farmer’s Poultry: MP
Flo’s Total Product & Average Product Schedule
Corn Input (40-lb. bags)
Chicken Output (lbs.) Marginal Product (lbs. per bag)
0 0.0 14.0
22.0
30.0
34.0
30.0
26.0
19.0
9.0
1.4
-5.4
-15.0
-21.0
1 14.0
2 36.0
3 66.0
4 100.0
5 130.0
6 156.0
7 175.0
8 184.0
9 185.4
10 180.0
11 165.0
12 144.0
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Florence Farmer’s Poultry: MP
-30
-20
-10
0
10
20
30
40
1 2 3 4 5 6 7 8 9 10 11 12
MarginalProduct
Quantity of Corn Input (bags per week)
Marg
inal
Pro
du
ct
(pou
nd
s of
ch
icken
per
week)
Increasing Marginal Returns
Diminishing Marginal Returns
Negative Marginal Returns
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“Law” of Diminishing Marginal Returns
An increase in the amount of any one input, holding the amounts of all others constant,
ultimately leads to lower marginal returns to the expanding input.
In other words: In the short run, eventually it’s not worth it to
keep adding more input because the output will decrease.
(does not hold true in the long run!!!)
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Short Run vs. Long Run short run: period in which the
usable amount of at least 1 input is fixed while the usable amount of at least 1 input can change
long run: period in which the amounts of all inputs can be changed
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Returns to Scale scale of production: overall level of use of all
factors of production returns to scale: relationships b/t changes in
scale of production and corresponding change in output increasing: output more rapidly than rate of
of inputs decreasing: output less rapidly than rate of
of inputs constant: output at same rate of of inputs
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Returns to Scale ExamplesIdentify whether returns to scale are
increasing, decreasing or constant:1. Inputs increase 66% and output
increases 66%2. Inputs are tripled and output
doubles3. Inputs are increased by 15% and
output increases by 25%