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# Production and Costs - PowerPoint PPT Presentation

Production and Costs. Average and Marginal Product. Marginal Product of Labor=Increase of Product when Employing an Additional Worker ( ≠ marginal benefit) Average Product of Labor or Product per Worker=Total Product/Number of Workers. Total, Marginal and Average Products.

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## PowerPoint Slideshow about ' Production and Costs' - vilmos

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### Production and Costs

Marginal Product of Labor=Increase of Product when Employing an Additional Worker (≠ marginal benefit)

Average Product of Labor or Product per Worker=Total Product/Number of Workers

Output

TP

Output per Worker

MPL

Q

Diminishing Marginal Returns

Gains of Specialization

APL

L

Number of Workers

L0

L1

Number of Workers

Suppose that 5 bakers bake 500 cupcakes. The average product of labor is 100 (500/5).

A new baker is employed and total output goes up to 630 cupcakes.

The marginal product of adding an additional worker is 130. The new average product of labor is 630/6=105.

If the marginal product of labor is larger than 100, the average product of labor rises. If the marginal product of adding an additional worker is less than 100, the average product of labor falls.

Then, the marginal product curve cross the average product curve when the average cost of labor is at the maximum.

Costs (5 machines \$10 per machine, wage is \$15 per worker)

AVC=VC/Q

AC=TC/Q

If labor is the only Variable Input: Variable Cost

AVC=VC/Q=(PL*L)/Q=PL/(Q/L)=PL/APL

Marginal Costs

The increase in total cost when increasing production by 1 unit (not when increasing labor by 1 unit!).

MC=PL*(1/MPL)

One additional worker adds MPL to product. It is needed 1/MPL units of workers to produce one unit of the product.

\$

TC

VC

Output

MC=PL*(1/MPL)

Output per Worker

MC

\$ per unit of output

MPL

AC

AVC

APL

AVC=PL/APL

Q0(L0)

Q1(L1)

Output

L0

L1

Number of Workers

Suppose the total cost of producing 5 units is \$100. The average cost is \$20. A new unit is produced and the total cost goes to \$130.

The marginal cost of producing an additional unit is \$30. The new average cost is 130/6=25.

If the marginal cost is larger than 20, the average cost rises. If the marginal cost of producing an additional unit is less than 20, the average cost falls.

Then, the marginal cost cross the average cost curve when the average cost of labor is at the minimum.

\$

Cost per unit of output

ATC

FC

AVC

AFC

Output

Output

Cost per Unit

AC long run

ACSR

Q*

Output