micro eco (cost chap-8)1
TRANSCRIPT
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Costs
Chapter 8-1
(my version of it)
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Laugher Curve
A woman hears from her doctor that she
has only half a year to live.
The doctor advises her to marry aneconomist and to move to South Dakota.
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Laugher Curve
Will this cure my illness? she asked.
No, but the half year will seem pretty
long.
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Introduction
In the supply process, people first offer
their factors of production to the market.
Then the factors are transformed by firmsinto goods that consumers want.
Production is the name given to that
transformation of factors into goods.
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The Role of the Firm
The firm is an economic institution that
transforms factors of production into
consumer goods it:
Organizes factors of production.
Produces goods and services.
Sells produced goods and services.
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Virtual firms subcontract out all work. More and more of the organizational structure
of business is being separated from the
business.
The Role of the Firm
A virtualfirm only organizes production.
Notintheb
ookbutsom
ethingtoth
inkabout!
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The Firm and the Market
Firms are the production organizations
that translate factors of production into
consumer goods.
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Production Tables and
Production Functions Aproduction table shows the output
resulting from various combinations of
factors of production or inputs.
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Production Tables and
Production Functions Marginal productis the additional output
that will be forthcoming from an additional
worker, other inputs remaining constant.
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Production Tables and
Production Functions Average productis calculated by dividing
total output by the quantity of the output.
Not in the text but an important conceptimportant concept to understand Average Cost later!
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Production Tables and
Production Functions Production function a curve that
describes the relationship between the
inputs (factors of production) and outputs.
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Production Tables and
Production Functions The production function tells the maximum
amount of output that can be derived from
a given number of inputs.
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A Production Table
Number ofworkers
Total outputMarginalproduct
Averageproduct
46
7653
10
25
1234
5
6789
10
0 455.75.85.6
5.24.6
4.03.32.5
410172328
3132
323025
0
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Output
3230282624222018161412108
6420
1 2 3 4 5 6 7 8 9 10Number of workers
TP
Outputperwork
er
1 2 3 4 5 6 7 8 9 10
Number of workers
7
6
5
4
3
2
1
0
MP
(a) Total product (b) Marginal and average product
AP
A Production Function
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The Law of Diminishing
Marginal Productivity Both marginal and average productivities
initially increase, but eventually they both
decrease.
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The Law of Diminishing
Marginal Productivity This means that initially the production
function exhibits increasing marginal
productivity.
Then it exhibits diminishing marginal
productivity.
Finally, it exhibits negative marginalproductivity.
Not in your bookNot in your book
Not in your bookNot in your book
This is in your book!This is in your book!
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The Law of Diminishing
Marginal Productivity The most relevant part of the production
function is that part exhibiting diminishing
marginal productivity.
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The Law of Diminishing
Marginal Productivity Law of diminishing marginal
productivity as more and more of a
variable input is added to an existing
fixed input, after some point the additionaloutput one gets from the additional input
will fall.
Fixed input
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The Law of Diminishing
Marginal Productivity
Number ofworkers
Totaloutput
Marginalproduct
Averageproduct
Increasingmarginal returns
Diminishingmarginal returns
Diminishingabsolute returns
46
765310
25
1234
5
6789
10
045
5.75.85.6
5.24.6
4.03.32.5
4
10
172328
3132
323025
0
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Output
Diminishing
marginalreturns
Diminishing
absolutereturns
3230282624
222018161412108
6420
1 2 3 4 5 6 7 8 9 10
Increasing
marginal
returns
Number of workers
TP
Outputp
erwork
er
1 2 3 4 5 6 7 8 9 10
Number of workers
7
6
5
4
3
2
1
0
MP
Diminishing
marginalreturns
Diminishing
absolutereturns
(a) Total product (b) Marginal and average product
AP
The Law of Diminishing
Marginal Productivity
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The Law of Diminishing
Marginal Productivity This law is also called the flower pot law.
If it did not hold true, the worlds entirefood supply could be grown in a single
flower pot.