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AP Economics. Mr. Bernstein Module 54: The Production Function November 3, 2014. AP Economics Mr. Bernstein. The Production Function The relationship between and firm’s inputs and outputs In general, the relationship is positive. AP Economics Mr. Bernstein. Input and Output

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Ap economics

AP Economics

Mr. Bernstein

Module 54:

The Production Function

November 3, 2014


Ap economics mr bernstein
AP EconomicsMr. Bernstein

The Production Function

  • The relationship

    between and firm’s

    inputs and outputs

  • In general, the

    relationship is

    positive


Ap economics mr bernstein1
AP EconomicsMr. Bernstein

Input and Output

  • Variable Inputs: can be increased to increase production

  • Fixed Inputs: cannot be increased in the near term to increase production

  • The short run: at least one input is fixed. The time period that is too brief for a firm to alter its

    plant size (capital is fixed)

  • The long run: all inputs may vary

    A period of time long enough for

    a firm to vary all inputs,

    including capital (ie plant size)

  • Time of “long run” varies by firm


Ap economics mr bernstein2
AP EconomicsMr. Bernstein

Total Product

  • TP (or Q)

  • Production function shows TP at various levels of a variable input or inputs (ie labor, raw materials) and fixed input (capital)

  • Typically increases rapidly at first (ie as new workers are hired) but as opportunities to specialize have been implemented, will rise slower…and eventually turn downward


Ap economics mr bernstein3
AP EconomicsMr. Bernstein

Marginal Product

  • The additional output produced as a result of hiring one more unit of the input

  • MPL = (Δ Total Output)/(Δ Labor)

  • MPC = (Δ Total Output)/(Δ Capital)

  • MP = slope of TP curve

  • TP curves demonstrate Diminishing Returns to Inputs

    • As more and more of a variable input is added to a fixed input, the additional output produced will decline

    • Not due to inferior quality of inputs


Ap economics mr bernstein4
AP EconomicsMr. Bernstein

Total Product Presented Graphically

  • MP can be diminishing but TP keeps rising until MP<0


Ap economics mr bernstein5
AP EconomicsMr. Bernstein

Marginal Product Presented Graphically

  • MP is diminishing , and therefore TP rising, until QL ~= 6.5