Econ 1B03 – Chapter 13
We often refer to diminishing MP (Marginal Product) as diminishing returns to an input
In our example, we have diminishing returns to labour
Now let’s graph Jerry’s production function:
Maximum of the function occurs when the tangent is 0 (50, 180)
Whenever marginal product is 0 you are maximizing total product(TP)
Notice that TP is maximized when the slope of the TP function is 0.
Since the slope of the TP function is MP
TP is maximized when MP = 0
Also related to production is the concept of Average Product, AP = Q/# of inputs
AP tells us the quantity of output per input, in our case, Jerry’s labour.
AP will also diminish at some point
Let’s calculate it:
o MP = AP at maximum AP
Things to note:
o TP is maximized when L = 50
o This means that MP = 0 when L = 50
o AP intersects MP at max AP
Most MP and AP curves are nice and smooth:
Whenever MP is higher than AP, AP is necessarily increasing.
Whenever MP is less than AP, AP is decreasing
Also note, Jerry wouldn’t hire after the 50 worker because they lower his output
A firm goes from 4 to 5 workers. MP goes from 9 to 7; average production goes from 6 to 7.
o AP is at a maximum. When AP = MP, AP is at maximum. TP is maximized when MP = 0.
We don’t know where MP was maximized. Not enough info. Cost of Production
Of course, Jerry is concerned about his costs of production.
Costs of production may be divided into fixed costs and variable costs.
Fixed Costs: Costs are that do not vary with a change in output level. E.g. rent, loan payments
Variable costs: Costs that do vary with changes in output levels. E.g. labour costs, raw materials
Costs also depend on the time horizon