Principles of Microeconomics: Short-Run and Long-Run, Specialization of Labor, and Diminishing Marginal Returns

1. Welcome to Day 10 Principles of Microeconomics

2. Goals for Today1) Short-run and long-run2) Specialization of labor3) Diminishing marginal returns

3. Now we move into chapter 7 to talk about production and cost. We’ve already seen in our elasticity of supply discussion that time matters for how much is produced. Two Time FramesShort-Run: Some inputs are fixedLong-Run: All inputs are variable

4. Marginal Product of Labor (MPL) is the increase in total output gained by adding one more worker.Q/L

5. N Q MPL0 0 201 20 302 50 253 75 104 85

6. N Q MPL0 0 201 20 302 50 253 75 104 85 Why would MPL be rising?

7. Specialization of Labor1) Take advantage of natural abilities.2) More practice and training at specific jobs.3) Less time lost walking between jobs.

8. N Q MPL0 0 201 20 302 50 253 75 104 85 Specialization of Labor Region

9. N Q MPL0 0 201 20 302 50 253 75 104 85 Specialization of Labor Region Why would MPL be falling?

10. Diminishing Marginal ReturnsAs more variable factors are added to work with a fixed factor, eventually output rises at a diminishing rate.

11. N Q MPL0 0 201 20 302 50 253 75 104 85 Specialization of Labor Region Diminishing Marginal Returns Region

12. Productivity of Labor Measured in MPL

13. What we learned today.1) Short-run and long-run.2) Marginal product of labor.3)Specialization of labor and diminishing marginal returns.

14. Welcome to Day 11 Principles of Microeconomics

15. What we learned last class.1) Short-run and long-run.2) Marginal product of labor.3)Specialization of labor and diminishing marginal returns.

16. Goals for Today1) Average-marginal rule.2) Fixed and variable cost.3) Marginal and average cost.4) Long-run average cost.

17. Now that we know what MPL is, here is a new statistic for you.Average Product of Labor (APL) = Q/N

18. Average-Marginal Rule:When the marginal is above the average, the average rises; when the marginal is below the averge, the average fall.

19. N Q MPL APL0 0 0 201 20 20 302 50 25 253 75 25 104 85 21.25

20. Marginal and Average Product of Labor on the same graph. MPL

21. Marginal and Average Product of Labor on the same graph. MPL

22. OutputMPLAPLNumber Workers

23. I told you the productivity story just so I can tell you the cost story.

24. Fixed Costs (don’t change as production varies): Lease PaymentsInterest on LoansSome Insurance Variable Costs (do change as production varies):LaborSupplyElectricity

25. Q TFC TVC TC MC ATC0 100 0 100 -- - -1 100 20 120 20 1202 100 35 135 15 67.53 100 60 160 25 53.34 100 100 200 40 505 100 160 260 60 52

26. If workers cost $10 each, how many workers did the firm hire to build 1 radio? How about 2 radios?

27. Why does it take 2 full workers to make the first radio, but only another 1.5 to make the second radio? The workers must be getting more productive. Why would that be?

28. Why does it take 2 full workers to make the first radio, but only another 1.5 to make the second radio? The workers must be getting more productive. Why would that be?Specialization of Labor

29. Why does it take 4 workers to make radio 4, but 6 workers to make radio 5?

30. Why does it take 4 workers to make radio 4, but 6 workers to make radio 5?Diminishing Marginal Returns

31. Q TFC TVC TC MC ATC0 100 0 100 -- - -1 100 20 120 20 1202 100 35 135 15 67.53 100 60 160 25 53.34 100 100 200 40 505 100 160 260 60 52Above the green line is SoL. Below is DMR.

32. Marginal Cost and Average Total Cost on the same graph. MC

33. Marginal Cost and Average Total Cost on the same graph. Dollars MC Fixed Cost ATC Diminishing Marginal Returns Specialization of labor Output

34. In the short-run, the size of the factory is fixed.In the long-run, the size of the factory can be varied.

35. The LRATC is made up of segments of the various possible SRATC curves.

36. Economies of Scale - LRATC is falling as you produce more in a larger factory.Constant returns to Scale - LRATC is staying the same as you produce more in a larger factory.Diseconomies of Scale - LRATC is rising as you produce more in a larger factory

38. Why Economies of Scale?1) Specialization of Labor2) Mass Production Techniques – Assembly Lines

39. Why Diseconomies of Scale? 1) Leviathan Problems 2) Law of Increasing Opportunity Cost Problems

40. Would you always want to produce in constant returns to scale since that is the lowest cost of production area?

41. Would you always want to produce in constant returns to scale since that is the lowest cost of production area? No! How many customers you have and how much they are willing to pay matters also.

42. What We Learned Today1) Average-marginal rule.2) Fixed and variable cost.3) Marginal and average cost.4) Long-run average cost.5) Economies of scale, diseconomies of scale, and constant returns to scale.

43. Welcome to Day 12 Principles of Microeconomics

44. What We Learned Last Class1) Average-marginal rule.2) Fixed and variable cost.3) Marginal and average cost.4) Long-run average cost.5) Economies of scale, diseconomies of scale, and constant returns to scale.

45. Goals for Today1) What is perfect competition?2) How does a firm in perfect competition choose its price and quantity?

46. Alright, so you learned all this about productivity and cost. What is the business actually going to do?For that, we have to bring in the customers.

47. Businesses operate in different environments, called market structures.

48. There are 4 market structures. Each market structure is defined by:1) How many firms sell in it.2) How close the firms products are to each other.3) How easy it is to get into or out of the market.

49. The first market structure is “Perfect Competition”1) Many sellers and buyers.2) Firms sell identical goods.3) There is easy entry/exit.

50. Because there are many firms selling identical products, the sales price is the same for all firms. These firms are called Price Takers.