The Production Function

1. The Production Function Chapter 13

2. Maximum Profits Firm Behavior • Firm’s have an economic goal to maximize profit • Profit=Total Revenue – Total Costs • Producing at unit elasticity only maximizes total revenue • To maximize profit firms focus on ↓ costs of production • If costs ↓ =>Profit ↑ Productivity ↑ => Costs ↓ => Profit ↑

3. Production Function OUTPUT Known as Total Product (output) Production Function • Production Function-measuresthe relationship between Qty of inputsand Qty of output Inputs: Labor Capital (human & physical) Natural Resources Entrepreneurial Talent

4. Gain 5 more computers Marginal Product (output) • Marginal product - the increase in output that arises from one additional unit of input Add 1 worker Goal is to ↑ productivity (efficiency) of workers Then costs ↓ => profit rises!

5. Law of Diminishing Marginal Product • As firms add inputs—at some point----marginal product (MP)will begin to decline • Example: As more and more workers are hired => eventually each additional worker contributes less output 10 16 20 30 20 MP = # T-Shirts per worker 8

6. The slope of the production function measures the marginal product of the next input Quantity of output Total Product = Total Output As marginal productdeclines, the production function becomes flatter Number of Workers Hired

7. Production Function Graph TP Once MP turns negative => TP begins to decline AP MP

8. Worksheet #1 • Lesson 2, Activity 25 pg. 131