Chapter 6 production
Theory of the firm = explanation of how a firm makes cost-minimizing production decisions
and how its cost varies with its output.
Firms offer a means of coordination. It eliminates the need for every worker to negotiate
every task that he or she will perform and bargain. Firms avoid bargaining by managers that
direct the production of salaried workers.
Factors of production = inputs into the production process.
Production function = function showing highest output that a firm can produce for every
specified combi of inputs.
→ q = F(K, L) it relates q of output to the quantities of inputs capital and
labor
Inputs and outputs are flows. Because production function allows inputs to be combined in
varying proportions, output can be produced in many ways. Functions describe what is
technically feasible when the firm operates efficiently, thus when firm uses each combi of
inputs as effectively as possible.
Short run = period of time in which quantities of one or more production factors cannot be
changed.
Fixed input = production factor that cannot be varied.
Long run = amount of time needed to make all production inputs variable.
In short-run, firms vary intensity with which they utilize a given plant and machinery. In long-
run, they vary size of the plant. All fixed inputs in short-run represent outcomes of previous
long-run decisions based on estimates of what a firm could profitably produce and sell.
When capital is fixed and labour is variable, it can only produce more if labour input is
increased.
- Average product = output per unit of a particular input.
Average product labor = output / labor input = q / L
- Marginal product = additional output produced as an input is increased by one unit.
Marginal product labor = change in output / change in labor input = Δq / ΔLq / Δq / ΔLL
Average product and marginal product first increases, then falls.
Average product and marginal product curves are closely related. When marg.pr. is greater
than ave.pr., the ave.pr. is increasing. When marg.pr. is less than ave.pr., the ave.pr. is
decreasing.
Marg.pr. must equal the ave.pr. when ave.pr. reaches the maximum. The ave.pr. of labor is
given by the slope of line drawn from the origin to the corresponding point on the total
product curve. The marg.pr. of labor at a point is given by slope of total product at that point.
Law of diminishing marginal returns = principle that as the use of an input increases with
other inputs fixed, the resulting additions to output will eventually decrease. It results from
limitations on the use of other fixed inputs. It describes a declining marginal product.
Labor determines real standard of living that a country can achieve for its citizens.
Aggregate value of goods and services produced is equal to payments made to all factors of
production.
Theory of the firm = explanation of how a firm makes cost-minimizing production decisions
and how its cost varies with its output.
Firms offer a means of coordination. It eliminates the need for every worker to negotiate
every task that he or she will perform and bargain. Firms avoid bargaining by managers that
direct the production of salaried workers.
Factors of production = inputs into the production process.
Production function = function showing highest output that a firm can produce for every
specified combi of inputs.
→ q = F(K, L) it relates q of output to the quantities of inputs capital and
labor
Inputs and outputs are flows. Because production function allows inputs to be combined in
varying proportions, output can be produced in many ways. Functions describe what is
technically feasible when the firm operates efficiently, thus when firm uses each combi of
inputs as effectively as possible.
Short run = period of time in which quantities of one or more production factors cannot be
changed.
Fixed input = production factor that cannot be varied.
Long run = amount of time needed to make all production inputs variable.
In short-run, firms vary intensity with which they utilize a given plant and machinery. In long-
run, they vary size of the plant. All fixed inputs in short-run represent outcomes of previous
long-run decisions based on estimates of what a firm could profitably produce and sell.
When capital is fixed and labour is variable, it can only produce more if labour input is
increased.
- Average product = output per unit of a particular input.
Average product labor = output / labor input = q / L
- Marginal product = additional output produced as an input is increased by one unit.
Marginal product labor = change in output / change in labor input = Δq / ΔLq / Δq / ΔLL
Average product and marginal product first increases, then falls.
Average product and marginal product curves are closely related. When marg.pr. is greater
than ave.pr., the ave.pr. is increasing. When marg.pr. is less than ave.pr., the ave.pr. is
decreasing.
Marg.pr. must equal the ave.pr. when ave.pr. reaches the maximum. The ave.pr. of labor is
given by the slope of line drawn from the origin to the corresponding point on the total
product curve. The marg.pr. of labor at a point is given by slope of total product at that point.
Law of diminishing marginal returns = principle that as the use of an input increases with
other inputs fixed, the resulting additions to output will eventually decrease. It results from
limitations on the use of other fixed inputs. It describes a declining marginal product.
Labor determines real standard of living that a country can achieve for its citizens.
Aggregate value of goods and services produced is equal to payments made to all factors of
production.
