Introduction
In the supply process, people first offer their factors of production to the market. Then the factors are transformed by firms into goods that consumers want.
Production is the name given to that transformation of factors into goods.
Firms
1. Organize factors of production and/or 2. Produce goods and services and/or 3. Sell produced goods and services
A virtual firm organizes production and subcontracts out all work Many of the organizational structures of business are being separated from the production process
12-6
For economists, total cost is explicit payments to the factors of production plus the opportunity cost of the factors provided by the owners of the firm For economists, total revenue is the amount a firm receives for selling its product or service plus any increase in the value of the assets owned by the firm
12-7
A production table is a table showing the output resulting from various combinations of factors of production or inputs
Real-world production tables are complicated This analysis will concentrate on short run production when in which one of the factors is fixed
12-13
A Production Table
Number of workers 0 1 2 3 4 5 6 7 8 9 10 Total output 0 4 10 17 23 28 31 32 32 30 25 Marginal product 4 6 7 6 5 3 1 0 2 5 Average product 4 5 5.7 5.8 5.6 5.2 4.6 4.0 3.3 2.5
A Production Function
32 30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 7 6 TP Output per worker 5 4 3 2 1 1 2 3 4 5 6 7 Number of workers 8 9 10 3 4 5 6 7 Number of workers (b) Marginal and average product 0 1 2 8 9 MP 10 AP
Output
A Production Table
# of workers Total Output Marginal Product Average Product
0 1
0 4
4
6 7
--4
2 3 4 5 6 7 8 9 10
10 17 23 28 31 32 32 30 25
6
5 3
1
0 -2 -5
Marginal product is the additional output that will be forthcoming from an additional worker, other inputs constant
12-22
Marginal product
4 6 7 6 5 3 1 0 2 5
Average product 4 5 5.7 5.8 5.6 5.2 4.6 4.0 3.3 2.5 Increasing marginal returns
Output
TP
A production function is the relationship between then inputs and the outputs
12-29
6
4 2
AP
1 2 3 4 5 6 7 8 9 10 Number of workers
0
-2 -4
MP
Diminishing marginal productivity Diminishing Absolute productivity
12-30
0 1 2 3 4 5 6
0 4 10 17 23 28 31
6
7 6 5 3 1 0 -2 -5
7 8 9 10
32 32 30 25
12-31
More than 3 units of machinery and more than 4 units of labor Less than 3 units of machinery and less than 4 units of labor
Properties of Isoquant
Isoquants are negatively inclined. No Isoquants can intersect each other. No Isoquants can touch either axis. Each Isoquant is convex to the origin. An Isoquant lying above and to the right of one more stands indicates the maximum productivity.
An Isoquant
Capital, K (machines rented)
12 10 8 i 6 4 2 j 0 1 2 3 4 5 6 7
Each point on a given isoquant represents different recipes for producing the same level of output.
An Isoquant Map
Capital, K (machines rented) 9 10 m
k j
0 0 1
9 10
44
An Isoquant Map
$6
f 7 8 9 10 Labor, L (worker-hours employed)
48
Changes in Cost
Capital, K (machines rented)
10 8 6 4 2 h 0 1 2 3 4 5 6 7 8 9 10 Labor, L (worker-hours employed)
50
Slope of an Isocost
Wage-rental ratio
With K on the y axis and L on the x axis, the slope of any isocost line equals W/R, the wage-rental ratio. It is also the relative price of labor
Cost Minimization
Capital, K (machines rented) 12 10 8 a
Choose the combination where the desired isoquant is tangent to the lowest isocost.
C = $36
6 4 2
C = $18 W = $6; R = $3;C = $30
equ.
constant (EFFECTIVENESS).
50 TARGETS 40 TARGETS 30 TARGETS 20 TARGETS 10 TARGETS
BOMBERS
40 20 0
E1
20
40
BOMBS
60
80
100
Conclusion: Buy resources such that the last dollar spent on K adds the same amount to output as the last dollar spent on L.
The |slope| of the isocost line = W/R. The |slope| of the isoquant = MPL/MPK
60
RETURNS TO SCALE
(PRODUCTION OF AMN SHELLS IN ORD FACTORY PER MACHINE)
RETURNS TO SCALE
(PRODUCTION OF AMN SHELLS IN ORD FACTORY PER MACHINE)
RETURNS TO SCALE
(PRODUCTION OF AMN SHELLS IN ORD FACTORY PER MACHINE)
4 WORKERS+ 12 hrs
5 WORKERS +15 hrs 6 WORKERS + 18 hrs. 7 WORKERS + 21 hrs 8 WORKERS + 24 hrs 9 WORKERS + 27 hrs
RETURNS TO SCALE
(PRODUCTION OF AMN SHELLS IN ORD FACTORY PER MACHINE)
200
500 900
4 WORKERS+ 12 hrs
5 WORKERS +15 hrs 6 WORKERS + 18 hrs. 7 WORKERS + 21 hrs 8 WORKERS + 24 hrs 9 WORKERS + 27 hrs
1400
1900 2400 2800 3100 3200
RETURNS TO SCALE
(PRODUCTION OF AMN SHELLS IN ORD FACTORY PER MACHINE)
200
500 900
200
300 400
4 WORKERS+ 12 hrs
5 WORKERS +15 hrs 6 WORKERS + 18 hrs.
1400
1900 2400
500
500 500 STAGE OF CONSTANT RETURNS
7 WORKERS + 21 hrs
8 WORKERS + 24 hrs 9 WORKERS + 27 hrs
2800
3100 3200
400
300 100
LONG-RUN COST
Plant Size and Cost
When a firm changes its plant size, its cost of producing a given output changes. Will the average total cost of producing a gallon of smoothie fall, rise, or remain the same? Each of these three outcomes arise because when a firm changes the size of its plant, it might experience:
Economies of scale Diseconomies of scale Constant returns to scale
LONG-RUN COST
Economies of Scale Economies of scale exist if when a firm increases its plant size and labor employed by the same percentage, its output increases by a larger percentage and average total cost decreases. The main source of economies of scale is greater specialization of both labor and capital.
LONG-RUN COST
Diseconomies of Scale Diseconomies of scale exist if when a firm increases its plant size and labor employed by the same percentage, its output increases by a smaller percentage and average total cost increases. Diseconomies of scale arise from the difficulty of coordinating and controlling a large enterprise. Eventually, management complexity brings rising average total cost.
LONG-RUN COST
Constant Returns to Scale Constant returns to scale exist if when a firm increases its plant size and labor employed by the same percentage, its output increases by the same percentage and average total cost remains constant. Constant returns to scale occur when a firm is able to replicate its existing production facility including its management system.
Economies of Scope
If a single firm can jointly produce goods X and Y more cheaply that any combination of firms could produce them separately, then the production of X and Y is characterized by economies of scope
It refers to reduction in unit cost realized when firm produces two or more products jointly rather than separately.
Economies of scope arise from complementarities in the production or distribution of distinct goods or services