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oct 22 costs of production.docx

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University of Toronto St. George
James Pesando

PRODUCTION AND COST SCHEDULES 1. PR PRODUCTION FUNCTION Production Function: Relates the output to quantity of inputs (capital, labour) Short run: One input (capital) is fixed, while one input (labour) can vary Long run: All inputs (capital, labour) can vary Example: General Motors Short run: GM can vary amount of labour (overtime, lay-offs) GM cannot vary number of plants (capital) Long run: GM can vary number of plants and amount of labour PRODUCT SCHEDULES (short run) Total product (TP) -> total output, given labour input Marginal Product* -> Increase in total output divided by increase in labour input Law of diminishing returns: the marginal product of a variable input, in the presence of a fixed input, eventually diminishes i.e. keep increasing labour, only have one factory, space will eventually run out, productivity decreases Labour Output (Total Product) Marginal Product 0 0 1 4 4 2 10 6 3 13 3 4 15 2 5 16 1 Law of Diminishing Returns: intuition Fixed input: land (100 acres) Variable input: labour (farm workers) As number of farm workers increases, the amount of land available to each worker falls, and Marginal product of each additional farm worker e
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