MGMT 4A Lecture Notes - Lecture 2: Marginal Cost, Marginal Product
Document Summary
Production function: specifies max output w/ a given quantity of inputs for a given state of engineering and technical knowledge. Q- quantity, f- state of technology, k- capital, l-labor, r-resources. Short run: capital is fixed; must change variable inputs. Add shifts, hire more workers, more energy/raw materials, 24/7 operations. Fixed costs: costs that don"t change w/ level of output. Rent, interest on bonds, insurance premiums, salaries of top management, etc. Variable costs: costs that change w/ level of output. Marginal cost: additional cost incurred in producing one extra unit of output. In the short run, the marginal product of each additional worker must begin to decrease. Marginal product: extra output added by one extra unit of a factor input. Can"t keep adding forever as you add inputs. Vertical axis: relationship of total product of labor. As firm"s output increases, it spreads its fixed costs over a larger number of units. As afc falls, this is a must.
