1. CHAPTER 4 The Production Process of Firms

9. q = f (K, L, M…) 4.4 The Production Process Input: Raw Material Input: Capital Input: Labour Output Technology Input decision : >>How many >>Which types Cost decision Selling price

12. A Production Function and Total Cost For Hungry Helen’s Cookie Factory QUANTITY OF WORKERS OUTPUT MP AP COST OF FACTORY COST OF WORKERS TOTAL COST 0 1 2 3 4 5 6 7 8 0 2 5 9 12 14 15 15 14 - 2 3 4 3 2 1 0 -1 - 2 2.5 3 3 2.8 2.5 2.1 1.8 $30 30 30 30 30 30 30 30 30 $0 10 20 30 40 50 60 70 80 $30 40 50 60 70 80 90 100 110

13. Number of Workers Hired Quantity of output TP Hungry Helen’s Production Function

17. Labor Labor TP AP, MP Stage 1 Stage 2 Stage 3 TP AP MP Stages of Production B C A

18. Increasing Marginal Returns Total Product, TP Quantity of Labor Average Product, AP, and Marginal Product, MP Quantity of Labor Total Product Marginal Product Average Product Increasing Marginal Returns

19. Diminishing Marginal Returns Total Product, TP Quantity of Labor Average Product, AP, and Marginal Product, MP Quantity of Labor Total Product Marginal Product Average Product Diminishing Marginal Returns

20. Negative Marginal Returns Total Product Quantity of Labor Average Product, and Marginal Product Quantity of Labor Total Product Marginal Product Average Product Negative Marginal Returns

23. q TFC (RM) AFC (RM) 0 1 2 3 4 5 1000 1000 1000 1000 1000 1000 - 1000 500 333 250 200

28. Quantity of Output Costs $3.00 2.50 2.00 1.50 1.00 0.50 0 4 2 6 8 14 12 10 MC ATC AVC AFC Marginal Cost declines at first and then increases due to diminishing marginal product. Note how MC hits both ATC and AVC at their minimum points. AFC declines when output increases .

30. Productivity and Costs Are Mirror Images MP AP MC AVC Pull down the average Pull up the average Costs (dollars) Average Product and Marginal Product Quantity of labor Quantity of output

35. Table: Cost, Revenues & Profit Calculation MC = MR (1) Output (q) (unit) (2) TFC (RM) (3) TVC (RM) (4) MC (RM) (5) P = MR (RM) (6) TR (p*q) (RM) (7) TC (TFC + TVC) (RM) (8) PROFIT (TR – TC) (RM) 0 10 0 - 15 0 10 (10) 1 10 10 10 15 15 20 (5) 2 10 15 5 15 30 25 5 3 10 20 5 15 45 30 15 4 10 35 15 15 60 45 15 5 10 55 20 15 75 65 10 6 10 80 25 15 90 90 0

36. 4.8 Long Run Cost Curve >> No fix scale of operation << Larger scale Smaller scale Economies of scale Diseconomies of scale Reduce production cost Growth constraint Constant return to scale Reflect in the firm’s long run average cost (LRAC) is U-shape Effect on average cost No effect on the cost

41. Quantity of Cars per Day 0 Average Total Cost Long Run Average Cost Curve ATC 1,000 10,000 Economies of scale Diseconomies of scale Constant returns to scale

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