ECO101H1 Lecture Notes - Diminishing Returns, Marginal Cost, Marginal Product
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Topic 7 t Production & Cost Schedule
(Week seven Oct 25th-Nov 1st)
1. Production Function;
2. Product Schedule (Short Run)
-- Law of Diminishing Returns;
3. Cost of Productions (Short Run)
-- Properties of firms[ cost curves;
4. Average Costs
-- why curves are shaped that way and their intercepts;
4. Long-Run Average Cost Curve;
5. Opportunity Cost and the Measurement of Economic Profit
z Production Function: relationship between output and the quantity of input.
Short-run: one input (capital) is fixed; while on input (labor) can vary;
Long-run: all inputs (capital, labor, etc.) can vary.
-- e.g. General Motors;
Short-run: GM can vary the amount of labor (overtime, lay-offs), but cannot vary the number of
plants (selling land);
Long-run: GM can vary both number of plants and amount of labor;
z Product Schedules (short-run)
Total output, given the labor input
Increase in total output divided by increase in labor input;
Total product divided by labor input.
2. Law of Diminishing Returns
The marginal product of a variable input, in the presence of a fixed input, eventually diminishes.
e.g. Numerical Example
a. This illustration strictly accords with the law of
(as labor increases, MP eventually decreases.).
b. If MP is above AP, AP is rising; if MP is less than AP, AP is
(this is merely mathematical observation, no economic
significance is involved. )
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