Economic Costs

Sep 30, 2017Download as ppt, pdf

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The document discusses the role of firms in transforming factors of production into consumer goods, highlighting production processes, marginal and average productivity, and the law of diminishing marginal returns. It explains how the marginal product and average product relate to the number of workers and the outputs produced. The concept emphasizes that as more variable inputs are added to fixed inputs, the additional output will eventually decrease, also known as the flower pot law.

Economy & Finance

Laugher Curve
A woman hears from her doctor that she
has only half a year to live.
The doctor advises her to marry an
economist and to move to South Dakota.

Laugher Curve
“Will this cure my illness?” she asked.
No, but the half year will seem pretty
long.”

Introduction
? In the supply process, people first offer
their factors of production to the market.
? Then the factors are transformed by firms
into goods that consumers want.
– Production is the name given to that
transformation of factors into goods.

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.

– 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 virtual firm only organizes production.
Not in the book but something to think about!

The Firm and the Market
? Firms are the production organizations
that translate factors of production into
consumer goods.

Production Tables and
Production Functions
? A production table shows the output
resulting from various combinations of
factors of production or inputs.

Production Tables and
Production Functions
? Marginal product is the additional output
that will be forthcoming from an additional
worker, other inputs remaining constant.

Production Tables and
Production Functions
? Average product is 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!

Production Tables and
Production Functions
? Production function – a curve that
describes the relationship between the
inputs (factors of production) and outputs.

Production Tables and
Production Functions
? The production function tells the maximum
amount of output that can be derived from
a given number of inputs.

A Production Table
Number of
workers Total output Marginal
product
Average
product
4
6
7
6
5
3
1
0
2
5
1
2
3
4
5
6
7
8
9
10
0
4
5
5.7
5.8
5.6
5.2
4.6
4.0
3.3
2.5
—
4
10
17
23
28
31
32
32
30
25
0

Output
32
30
28
26
24
22
20
18
16
14
12
10
8
6
4
2
0
1 2 3 4 5 6 7 8 9 10
Number of workers
TP
Outputperworker
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

The Law of Diminishing
Marginal Productivity
? Both marginal and average productivities
initially increase, but eventually they both
decrease.

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 marginal
productivity.
Not iN your bookNot iN your book
Not iN your bookNot iN your book
this is iN your book!this is iN your book!

The Law of Diminishing
Marginal Productivity
? The most relevant part of the production
function is that part exhibiting diminishing
marginal productivity.

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 additional
output one gets from the additional input
will fall.
Fixed input

The Law of Diminishing
Marginal Productivity
Number of
workers
Total
output
Marginal
product
Average
product
Increasing
marginal returns
Diminishing
marginal returns
Diminishing
absolute returns
4
6
7
6
5
3
1
0
2
5
1
2
3
4
5
6
7
8
9
10
0
4
5
5.7
5.8
5.6
5.2
4.6
4.0
3.3
2.5
—
4
10
17
23
28
31
32
32
30
25
0

Output
Diminishing
marginal
returns
Diminishing
absolute
returns
32
30
28
26
24
22
20
18
16
14
12
10
8
6
4
2
0
1 2 3 4 5 6 7 8 9 10
Increasing
marginal
returns
Number of workers
TP
Outputperworker
1 2 3 4 5 6 7 8 9 10
Number of workers
7
6
5
4
3
2
1
0
MP
Diminishing
marginal
returns
Diminishing
absolute
returns
(a) Total product (b) Marginal and average product
AP
The Law of Diminishing
Marginal Productivity

The Law of Diminishing
Marginal Productivity
? This law is also called the flower pot law.
? If it did not hold true, the world’s entire
food supply could be grown in a single
flower pot.

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Economic Costs

1. Costs Chapter 8-1 (my version of it)

2. Laugher Curve A woman hears from her doctor that she has only half a year to live. The doctor advises her to marry an economist and to move to South Dakota.

3. Laugher Curve “Will this cure my illness?” she asked. No, but the half year will seem pretty long.”

4. Introduction ? In the supply process, people first offer their factors of production to the market. ? Then the factors are transformed by firms into goods that consumers want. – Production is the name given to that transformation of factors into goods.

5. 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.

6. – 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 virtual firm only organizes production. Not in the book but something to think about!

7. The Firm and the Market ? Firms are the production organizations that translate factors of production into consumer goods.

8. Production Tables and Production Functions ? A production table shows the output resulting from various combinations of factors of production or inputs.

9. Production Tables and Production Functions ? Marginal product is the additional output that will be forthcoming from an additional worker, other inputs remaining constant.

10. Production Tables and Production Functions ? Average product is 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!

11. Production Tables and Production Functions ? Production function – a curve that describes the relationship between the inputs (factors of production) and outputs.

12. Production Tables and Production Functions ? The production function tells the maximum amount of output that can be derived from a given number of inputs.

13. A Production Table Number of workers Total output Marginal product Average product 4 6 7 6 5 3 1 0 2 5 1 2 3 4 5 6 7 8 9 10 0 4 5 5.7 5.8 5.6 5.2 4.6 4.0 3.3 2.5 — 4 10 17 23 28 31 32 32 30 25 0

14. Output 32 30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 1 2 3 4 5 6 7 8 9 10 Number of workers TP Outputperworker 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

15. The Law of Diminishing Marginal Productivity ? Both marginal and average productivities initially increase, but eventually they both decrease.

16. 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 marginal productivity. Not iN your bookNot iN your book Not iN your bookNot iN your book this is iN your book!this is iN your book!

17. The Law of Diminishing Marginal Productivity ? The most relevant part of the production function is that part exhibiting diminishing marginal productivity.

18. 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 additional output one gets from the additional input will fall. Fixed input

19. The Law of Diminishing Marginal Productivity Number of workers Total output Marginal product Average product Increasing marginal returns Diminishing marginal returns Diminishing absolute returns 4 6 7 6 5 3 1 0 2 5 1 2 3 4 5 6 7 8 9 10 0 4 5 5.7 5.8 5.6 5.2 4.6 4.0 3.3 2.5 — 4 10 17 23 28 31 32 32 30 25 0

20. Output Diminishing marginal returns Diminishing absolute returns 32 30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 1 2 3 4 5 6 7 8 9 10 Increasing marginal returns Number of workers TP Outputperworker 1 2 3 4 5 6 7 8 9 10 Number of workers 7 6 5 4 3 2 1 0 MP Diminishing marginal returns Diminishing absolute returns (a) Total product (b) Marginal and average product AP The Law of Diminishing Marginal Productivity

21. The Law of Diminishing Marginal Productivity ? This law is also called the flower pot law. ? If it did not hold true, the world’s entire food supply could be grown in a single flower pot.

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Economic Costs

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