The Frim / Marginal Productivity
The Production Function
  • It costs something to produce a good -- no matter what the good is.
  • Production Function - a technological relationship expressing the maximum quantity of a good attainable from difference combinations of factor inputs.
  • What we really want to know is how best to produce.
    • What is the smallest amount of resources needed to produce a specific product, or,
    • What is the maximum amount of output attainable from a given quantity of resources?
  • The purpose of a production function is to tell us just how much output we can produce with varying amounts of factor inputs.
  • The productivity of any factor of production depends on the amount of other resources available to it.
  • Productivity - output per unit of input, for example, output per labor hour.
  • Maximum output of a good from the resources used in production.
  • The production function represents the maximum technical efficiency (that is, the most output attainable from any given level of factor inputs)
Short-Run Constraints
  • Short-run - The period in which the quantity (and quality) of some inputs cannot be changed.
  • Labor is the variable input that determines how much output we get from our fixed inputs (land and capital).
  • Note:    The general assumption is that, in the short-run, labor can change while capital is held constant in the short-run.  As the amount of labor used increases, in general, the output will also increase.
Marginal Productivity
  • Marginal physical product (MPP) - The change in total output that results from employment of one additional unit of input.
  • Formula: 
                 change in total output
       MPP  =  --------------------------
                change in input quantity

  • Law of Diminishing Returns - the marginal physical product of a variable input declines as more of it is employed with a given quantity of other (fixed) inputs.
  • As more labor is hired, each unit of labor has less capital and land to work with
Economic vs. Accounting Costs
  • Accounting Costs:  all of the costs that have an explicit dollar cost attached to them.
  • Economic Cost:  the value of all resources used to produce a good or service; opportunity cost.
    • economic cost = explicit costs + implicit costs
Long-Run Costs
  • Long-Run:  a period of time long enough for all inputs to be varied (i.e., no fixed costs).
  • Long-Run Average Costs:  the long-run cost curve is just a summary of our best short-run cost possibilities, using existing technology and facilities.
  • Long-Run Marginal Costs:  the long-run marginal costs curve intersects our long-run cost curve at its lowest point.
Economies of Scale
  • Economies of Scale:  reductions in minimum average costs that come about through increases in the size (scale) of plant and equipment.
  • Constant Returns to Scale:  increases in plant size do not affect minimum average costs: minimum per-unit costs are identical for small plants and large plants.
  • Diseconomies of Scale  
    1. Although large plants may be able to achieve greater efficiencies than smaller plants, there’s no assurance that they actually will.
    2. Diseconomies of Scale occur when an increase in plant size results in reducing operating efficiency.
    3. Efficiency and size do not necessarily go hand in hand.

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this page is maintained by Reed Fisher
last updated January 15, 2011