Chapter 7 – Production. In this chapter students will be able to: Establish the relationship between inputs and output; define total, average, and marginal product, and explain the law of diminishing marginal returns in the short-run setting when at least some inputs are fixed; investigate the ability of a firm to vary its output in the long run when all inputs are variable;. | MICROECONOMICS: Theory & Applications By Edgar K. Browning & Mark A. Zupan John Wiley & Sons, Inc. 12th Edition, Copyright 2015 Chapter 7: Production Prepared by Dr. Della Lee Sue, Marist College Learning Objectives Establish the relationship between inputs and output. Define total, average, and marginal product, and explain the law of diminishing marginal returns in the short-run setting when at least some inputs are fixed. Investigate the ability of a firm to vary its output in the long run when all inputs are variable. Explore returns to scale: how a firm’s output response is affected by a proportionate change in all inputs. Describe how production relationships can be estimated and some different potential functional forms for those relationships. RELATING OUTPUT TO INPUTS Establish the relationship between inputs and output. Relating Output to Inputs Factors of production – inputs or ingredients mixed together by a firm through its technology to produce output . | MICROECONOMICS: Theory & Applications By Edgar K. Browning & Mark A. Zupan John Wiley & Sons, Inc. 12th Edition, Copyright 2015 Chapter 7: Production Prepared by Dr. Della Lee Sue, Marist College Learning Objectives Establish the relationship between inputs and output. Define total, average, and marginal product, and explain the law of diminishing marginal returns in the short-run setting when at least some inputs are fixed. Investigate the ability of a firm to vary its output in the long run when all inputs are variable. Explore returns to scale: how a firm’s output response is affected by a proportionate change in all inputs. Describe how production relationships can be estimated and some different potential functional forms for those relationships. RELATING OUTPUT TO INPUTS Establish the relationship between inputs and output. Relating Output to Inputs Factors of production – inputs or ingredients mixed together by a firm through its technology to produce output Production function – a relationship between inputs and output that identifies the maximum output that can be produced per time period by each specific combination of inputs Q = f(L,K) Technologically efficient – a condition in which the firm produces the maximum output from any given combination of labor and capital inputs PRODUCTION WHEN ONLY ONE INPUT IS VARIABLE: THE SHORT RUN Distinguish between variable and fixed inputs. Production When Only One Input is Variable: The Short Run Fixed inputs - resources a firm cannot feasibly vary over the time period involved Total product - the total output of the firm Average product - the total output (or total product) divided by the amount of the input used to produce that output Marginal product - the change in total output that results from a one-unit change in the amount of an input, holding the quantities of other inputs constant Table The Relationship Between Average and Marginal Product Curves When the marginal product
