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ECO100 - OCT 22

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University of Toronto St. George
James Pesando

PRODUCTIONAND COST SCHEDULES 1. Production Function ● Production Function: Relates output of good/services to quantity of inputs (capital, labour) ● Short-run: One input (capital) is fixed, while one input (labour) can vary. ● Long-run: All inputs (capital, labor) can vary ● Example: General motors ○ Short-run: GM can vary amount of labour (overtime, lay-offs) ■ Cannot vary number of plants (capital) ○ Long-run: GM can vary number of plants and amount of labour 2. Product Schedules (Short Run) Definitions ● Total Product: 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 ● Interested in marginal product Labour Output (Total Product) Marginal Product 0 0 1 4 4 2 10 6 3 13 3 4(hire 4th unit of labour... 15 2 marginal product is only 2) 5 16 1 ● Marginal product may initially increase if you hire more workers, but eventually it will decline (kicks in when you hire the third worker) ● 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 additional farm workers eventually falls. ○ ● [Note: if MP is above AP, AP is rising; if MP is less than AP, AP is falling] 3. Costs of Production (Short Run). Cost Schedules Measure of a Firm’s Cost of Production ● Total Cost: Total of all costs ● Total Fixed Costs: Total cost of fixed input (plant, land) ● Total Variable Cost: Total cost of variable input (workers) ● TC = TFC + TVC ● Marginal Cost: Increase in total cost divided by increase in output ○ MC = ● Note: TFC "Sunk Costs" Example: Cost Schedule, drawn to conform law of diminishing returns ● Wage rate: $10 Labour (L) Output (Q) Fixed (TFC) Variable Total MC ($ per (TVC) (TC) unit) 0 0 100 0 100 1 15 100 10 110 0.67 (10/15) 2 34 100 20 120 0.53 (10/19) 3 48
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