|The Frim / Marginal Productivity
|The Production Function
- It costs something to produce a good -- no matter what the
- Production Function - a technological
expressing the maximum quantity of a good attainable from difference
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
- The production function represents the maximum technical
(that is, the most output attainable from any given level of factor
- 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
short-run, labor can change while capital is held constant in the
As the amount of labor used increases, in general, the output will also
- Marginal physical product (MPP) - The change
in total output that results from employment of one additional unit of
change in total output
MPP = --------------------------
change in input quantity
- Law of Diminishing Returns - the marginal
product of a variable input declines as more of it is employed with a
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
- 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: a period of time long enough for all
inputs to be varied (i.e., no fixed costs).
- Long-Run Average Costs: the long-run
curve is just a summary of our best short-run cost possibilities, using
technology and facilities.
- Long-Run Marginal Costs: the long-run
marginal costs curve intersects our long-run cost curve at its lowest
|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
identical for small plants and large plants.
- Diseconomies of Scale
- Although large plants may be able to achieve greater
than smaller plants, there’s no assurance that they actually will.
- Diseconomies of Scale occur when an increase in plant
size results in reducing operating efficiency.
- Efficiency and size do not necessarily go hand in hand.