producer decision making chapter 4. production - a process by which resources are transformed into...
TRANSCRIPT
![Page 1: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/1.jpg)
Producer Decision Making
Chapter 4
![Page 2: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/2.jpg)
Production - a process by which resources aretransformed into products or services thatare usable by consumers.
Producer Decision Making
![Page 3: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/3.jpg)
Decisions a Producer Must Make
What to Produce?
How Much to Produce?
How to Produce?
How Big to Be?
Producer Decision Making
![Page 4: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/4.jpg)
Resource (input) - A factor that can beused to produce a product that cansatisfy a human want or desire.
Producer Decision Making
![Page 5: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/5.jpg)
Physical Relationships
Land - everything you see in viewing the earth’s surface.
Labor - physical act of performing a task.
Management - the sole responsibility of decision making.
Capital - every manufactured thing that can be used to aid or enhance production.
Producer Decision Making
![Page 6: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/6.jpg)
Different quantities and combinations of these four things will produce different amounts of the product.
Producer Decision Making
![Page 7: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/7.jpg)
Production Function
Y = Output
X = inputs (land, labor, capital, management)
Function Y = f ( x1, x2, x3, ..., xn )
This function is used to determine the level of output given the units of inputs.
Producer Decision Making
![Page 8: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/8.jpg)
Mapping a Production Function
III
III IV
Producer Decision Making
![Page 9: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/9.jpg)
Constant Returns - if all inputs were increased in a constant ratio, the output will increase by the same percentage as the inputs.
Producer Decision Making
![Page 10: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/10.jpg)
Total Physical Product CurveTPP
X
Y
TPP = Total Physical Product
Producer Decision Making
![Page 11: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/11.jpg)
X = 1 acre of land , $1000 of capital, 1 weekof management time.
2 X = 2 acres of land , $2000 of capital, 2weeks of management time.
X produces 5 units of output
2 X produces 10 units of output
Producer Decision Making
![Page 12: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/12.jpg)
Law of diminishing returns - as successiveamounts of a variable input are combined witha fixed input in a production process, thetotal product will rise, reach a maximum,then eventually decline.
Changing the Level of One Input
Producer Decision Making
![Page 13: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/13.jpg)
Changing the Level of One Input
Y
TPP
X1 X2, X3,...,Xn
Producer Decision Making
![Page 14: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/14.jpg)
Marginal Physical Product - the amount addedto total physical product when another unitof the variable input is used.
Changing the Level of One Input
Producer Decision Making
![Page 15: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/15.jpg)
Y
TPP
X1 X2, X3,...,Xn
Change in Y
Change in one unit of X
Marginal Physical Product
Producer Decision Making
![Page 16: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/16.jpg)
Y
TPP
X1 X2, X3,...,Xn
Or it could be measured at a point of Tangency.
.
Marginal Physical Product
Producer Decision Making
![Page 17: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/17.jpg)
Y
TPP
X1 X2, X3,...,Xn
What is MPP Here?
Marginal Physical Product
Producer Decision Making
![Page 18: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/18.jpg)
Y
TPP
X1 X2, X3,...,Xn
What is MPP Here?
Marginal Physical Product
Producer Decision Making
![Page 19: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/19.jpg)
MPP =Change in output TPP Y
Change in input X1 X1= =
Marginal Physical Product
Producer Decision Making
![Page 20: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/20.jpg)
Average Physical Product
Y
TPP
X1 X2, X3,...,Xn
APP
Producer Decision Making
Change in Y
Change in X
![Page 21: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/21.jpg)
Y
TPP
X1 X2, X3,...,Xn
Average Physical Product
APP
Producer Decision Making
![Page 22: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/22.jpg)
Y
TPP
X1 X2, X3,...,Xn
Average Physical Product
APP
Producer Decision Making
![Page 23: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/23.jpg)
Average Physical Product
APPOutput Y
Input X1= =
Producer Decision Making
![Page 24: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/24.jpg)
Y
X1 X2, X3,...,Xn
Marginal and Average Product Curves
Stage I Stage II Stage III
APP
MPP
Producer Decision Making
![Page 25: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/25.jpg)
Stage I Irrational
As long as MPP > APP it will always be profitable to usemore of that particular input. So because in Stage IMPP > APP everywhere, we will not produce in this region.
Producer Decision Making
![Page 26: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/26.jpg)
Y
X1 X2, X3,...,Xn
Marginal and Average Product Curves
Stage I Stage II Stage III
APP
MPP
Producer Decision Making
![Page 27: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/27.jpg)
Stage II Rational
In Stage II profit maximization will occur. APP > MPP everywhere, and production is stillincreasing with increases in inputs.
Producer Decision Making
![Page 28: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/28.jpg)
Y
X1 X2, X3,...,Xn
Marginal and Average Product Curves
Stage I Stage II Stage III
APP
MPP
Producer Decision Making
![Page 29: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/29.jpg)
Stage IIIIrrational
Stage III is irrational because as we increase theuse of the input X1 output actually falls as aresult. This cannot possibly be a profitableregion of production.
Producer Decision Making
![Page 30: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/30.jpg)
Y
X1 X2, X3,...,XnMarginal and Average Product Curves
Stage I Stage II Stage III
APP
MPP
Y
TPP
X1 X2, X3,...,Xn
Stage I Stage II Stage III
Total Physical Product Curve
![Page 31: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/31.jpg)
To determine the optimum level of an input, weneed information about the value of the productand the cost of the input.
Value of Product
TVP = Price of Product * Amount of Product
AVP = TVP / Quantity of Input (X1)
MVP = Change in TVP / Change in Quantity of Input (X1)
Producer Decision Making
![Page 32: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/32.jpg)
$Y
X1 X2, X3,...,Xn
Marginal and Average Value Curves
AVP
MVP
Producer Decision Making
![Page 33: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/33.jpg)
Cost of the input
Marginal Factor Cost - is the amount added to totalcost when an additional unit of the variable input isused.
MFCX 1 = PriceX 1
Producer Decision Making
![Page 34: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/34.jpg)
$Y
X1 X2, X3,...,Xn
Marginal and Average Value Curves
AVP
MVPMFC= PX 1
Optimal Input Usage
.
Producer Decision Making
![Page 35: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/35.jpg)
Total Factor Cost
TFC = Price X1 * Units of X1 used
Producer Decision Making
![Page 36: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/36.jpg)
$Y
X1 X2, X3,...,Xn
AVP
MVPMFC= PX 1
Optimal Input Usage
.
Total Factor Cost
TFC
Producer Decision Making
![Page 37: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/37.jpg)
Adjusting to Price Changes
PRODUCT PRICE CAN CHANGE AND WILL
INPUT PRICES CAN ALSO CHANGE
Producer Decision Making
![Page 38: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/38.jpg)
Changing the level of Product Price
$Y
X1 X2, X3,...,Xn
AVP
MVPMFC= PX 1
Optimal Input Usage
TFC
Increasing Output Price
Producer Decision Making
![Page 39: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/39.jpg)
Changing the level of Product Price
$Y
X1 X2, X3,...,Xn
AVP
MVPMFC= PX 1
Optimal Input Usage
.TFC
Increasing Output Price
Producer Decision Making
![Page 40: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/40.jpg)
$Y
X1 X2, X3,...,Xn
AVP
MVP
MFC= PX 1
Optimal Input Usage
.TFC
Changing the level of an input priceAn increase in MFC
Producer Decision Making
![Page 41: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/41.jpg)
$Y
X1 X2, X3,...,Xn
AVP
MVP
MFC= PX 1
Optimal Input Usage
.TFC
Changing the level of an input price
An increase in MFC
Producer Decision Making
![Page 42: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/42.jpg)
Deriving the demand for an input
Producer Decision Making
Price of Input Quantity of Input
15 30
10 40
5 60
2 80
![Page 43: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/43.jpg)
Product Price $
Quantity of Input
Demand
30 40 80
2
10
15
Producer Decision Making
![Page 44: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/44.jpg)
$Y
X1 X2, X3,...,Xn
AVPMVP or Demand forX1
0 120
$
Demand for input from MVP
Producer Decision Making
![Page 45: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/45.jpg)
$Y
X1 X2, X3,...,Xn
AVP
MVP or Demand forX1
0 120
$
Demand for input from MVP
MFC = Px1
60
Producer Decision Making
![Page 46: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/46.jpg)
$Y
X1 X2, X3,...,Xn
AVP
MVP or Demand forX1
0 120
$
Demand for input from MVP
MFC = Px1
60
Producer Decision Making
![Page 47: Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers](https://reader035.vdocuments.us/reader035/viewer/2022081519/56649c765503460f9492a11f/html5/thumbnails/47.jpg)
$Y
X1 X2, X3,...,Xn
AVP
MVP or Demand forX1
0 120
$
Demand for input from MVP
MFC = Px1
60
Producer Decision Making