2. Profit = Total revenue – Total cost
What is the goal of business?
We assume that the firm’s goal is to maximize profit.
3. Profit = Total revenue – Total cost
the amount a
firm receives
from the sale
of its output
the market
value of the
inputs a firm
uses in
production
What is the goal of business?
We assume that the firm’s goal is to maximize profit.
5. The Production Function
Production Function - Amount of outputs that
can be produced with a
given set of inputs
a.) Short run production
b.) Long run production
-Most resources are fixed. To
increase output a firm must
increase the quantity of labor it
employs
-Everything is variable
Everything we willEverything we will
discuss will be shortdiscuss will be short
run productionrun production
6. Profit = Total revenue – Total cost
Costs summary:__________________________
Goods and Services produced
Time
Production summary:____________________
Summarizing all theSummarizing all the
pieces of this generalpieces of this general
topictopic
7. Profit = Total revenue – Total cost
Costs summary:__________________________
Goods and Services produced
Time
Production summary:____________________
(TP) Total Product
(MP) Marginal Product
(AP) Average Product
Economic Profit
Accountant Profit
Explicit Costs
Implicit Costs
Short Run
1.)Fixed Costs
2.)Variable Costs
Long Run
1.) All Variable
(TC) Total Cost
1.) (TFC) Total Fixed cost
2.) (TVC) Total Variable cost
(MC) Marginal Cost
(AC) Average Cost
1.) (ATC) Average Total cost
2.) (AFC) Average Fixed cost
3.) (AVC) Average Variable cost
1.)Depreciation
2.) Normal Profit
(MP or MPL) Marginal Product of Labor
(DMR) Decreasing Marginal Returns
(TR) Total Revenue
(MR) Marginal Revenue
(AR) Average Revenue
8. Profit = Total revenue – Total cost
Costs summary:__________________________
Goods and Services produced
Time
Production summary:____________________
(TP) Total Product
(MP) Marginal Product
(AP) Average Product
(MP or MPL) Marginal Product of Labor
(DMR) Decreasing Marginal Returns
But will just start withBut will just start with
this part in this PPTthis part in this PPT
9. (TP) Total Product - is the total Q of a good
produced in a given
period.
-increases as the Q of labor
employed increases until
the point that reaches
DMR
-Most resources are fixed. To increase output a firm
must increase the quantity of labor it employs
Short Run Production
10. Points A through H on
the curve correspond
to the columns of the
table.
The TP curve is like
the PPF: It separates
attainable points and
unattainable points.
(TP) Total Product graph for a business
producing bottled water
11. Points A through H on
the curve correspond
to the columns of the
table.
The TP curve is like
the PPF: It separates
attainable points and
unattainable points.
(TP) Total Product graph for a business
producing bottled water
It’s similar concepts to aIt’s similar concepts to a
PPC curve, but for anPPC curve, but for an
individual firm withindividual firm with
inputs and outputsinputs and outputs
12. - increase in output from an
additional unit of that input,
holding all other inputs
constant.
(MP) Marginal Product
-Most resources are fixed. To increase output a firm
must increase the quantity of labor it employs
Short Run Production
(TP) Total Product
13. We can show
marginal
product
as the orange
bars that form
steps along
the total
product curve.
The height of
each step
represents
marginal
product.
15. Notice that the
steeper the slope of
the TP curve, the
greater is MP
marginal product.
The slope of the TP curveThe slope of the TP curve
is the MP curve!is the MP curve!
16. (MP) Marginal Product
-Most resources are fixed. To increase output a firm
must increase the quantity of labor it employs
Short Run Production
(TP) Total Product
- change in (TP) that results
from a one-unit increase
in the quantity of labor
employed.
(MPL) Marginal
Product of Labor
________________%% QQ
LL%%
______________________
- Percent change in
Quantity of output
- Percent change in
Quantity of Labor
Equation:
21. (MP) Marginal Product
Short Run Production
(TP) Total Product
(MPL) Marginal
Product of Labor
Increasing Marginal
Returns
Decreasing Marginal
Returns (DMR)
Negative Marginal
Returns
- MP of an additional worker
> MP of the previous
worker.
- MP of an additional worker <
MP of the previous worker.
- If you are doing this you are an
idiot.
22. (MP) Marginal Product
Short Run Production
(TP) Total Product
(MPL) Marginal
Product of Labor
(DMR) Decreasing Marginal Returns
- As a firm uses more of a
variable input, with
given fixed inputs, the
MP of the variable input
eventually decreases.
Law of Decreasing
Returns
26. • Increasing marginal
returns initially
• Decreasing
marginal returns
eventually
• Negative marginal
returns
The total product (TP) and
marginal product (MP) curves
incorporate a feature of all
production processes:
27. (MP) Marginal Product
-Most resources are fixed. To increase output a firm
must increase the quantity of labor it employs
Short Run Production
(TP) Total Product
(AP) Average Product
______________TPTP
# of workers# of workers
______________________- Total Product
- Number of workers
is the total product per
worker employed.
*** When marginal product exceeds
average product, average product is
increasing.
Equation:
28. -Most resources are fixed. To increase output a firm
must increase the quantity of labor it employs
Short Run Production
( AP) Average Product When MP > AP,
AP is increasing.
(MP) Marginal Product
and
When MP < AP,
AP is decreasing.
When MP = AP,
AP is at its maximum.
29. When marginal product
exceeds
average product, average
product is increasing.
When marginal product
is less than average
product, average
product is decreasing.
When marginal product
equals
average product, average
product is at its maximum.
30. When marginal product
exceeds
average product, average
product is increasing.
When marginal product
is less than average
product, average
product is decreasing.
When marginal product
equals
average product, average
product is at its maximum.MP and AP go up togetherMP and AP go up together
and go down together just atand go down together just at
different rates because theydifferent rates because they
are measuring differentare measuring different
thingsthings
31. Zheng is a part-time student who takes one course each semester. Her
grades are
First semester: Calculus - C (2)
Second semester: French - B (3)
Third semester: Economics - A (4)
Fourth semester: History - B (3)
Fifth semester: English - C (2)
Marginal and Average Values in YOUR
Life
Zheng’s grade in each semester is her marginal grade, which increases
from 2 to 3 to 4 and then decreases to 3 to 2.
What is Zheng’s average grade after each semester?
An Example:
32. The red curve shows
Zheng’s marginal grade.
The blue curve shows
Zheng’s average grade.
When Zheng’s marginal
grade exceeds her average
grade, the average rises.
When Zheng’s marginal
grade is less than her
average grade, the average
falls.
Marginal and Average Values in YOUR
Life
An Example:
34. Profit = Total revenue – Total cost
Costs summary:__________________________
Goods and Services produced
Time
Production summary:____________________
(TP) Total Product
(MP) Marginal Product
(AP) Average Product
(MP or MPL) Marginal Product of Labor
(DMR) Decreasing Marginal Returns
This covers theThis covers the
production sideproduction side
35. Points A through H on
the curve correspond
to the columns of the
table.
The TP curve is like
the PPF: It separates
attainable points and
unattainable points.
(TP) Total Product graph for a business
producing bottled water
It’s similar concepts to aIt’s similar concepts to a
PPC curve, but for anPPC curve, but for an
individual firm withindividual firm with
inputs and outputsinputs and outputs
36. We can show
marginal
product
as the orange
bars that form
steps along
the total
product curve.
The height of
each step
represents
marginal
product.
37. Notice that the
steeper the slope of
the TP curve, the
greater is MP
marginal product.
The slope of the TP curveThe slope of the TP curve
is the MP curve!is the MP curve!
38. When marginal product
exceeds
average product, average
product is increasing.
When marginal product
is less than average
product, average
product is decreasing.
When marginal product
equals
average product, average
product is at its maximum.
MP and AP go up together and goMP and AP go up together and go
down together just at different ratesdown together just at different rates
because they are measuring differentbecause they are measuring different
thingsthings
The grade point average versus marginal grade example (see slide 69) in the text is outstanding to use in class to describe how the marginal product and marginal cost curves relate to the average product and average cost curves. Once students can tell a story using the same intuition, they find drawing those curves much easier. While you have the curves drawn on the board or overhead, physically pull the average cost curves down (while marginal cost is below) or pull them up (when the marginal cost curve rises above). Use theatrics: raise your hands over your head and “pull down the curves.” If you have a more sports-oriented class, you can try using a batting average percentage and at-bat outcome example (if you had a .300 batting average and you struck out at your next at-bat [the marginal factor], your batting average is pulled down).
The grade point average versus marginal grade example (see slide 69) in the text is outstanding to use in class to describe how the marginal product and marginal cost curves relate to the average product and average cost curves. Once students can tell a story using the same intuition, they find drawing those curves much easier. While you have the curves drawn on the board or overhead, physically pull the average cost curves down (while marginal cost is below) or pull them up (when the marginal cost curve rises above). Use theatrics: raise your hands over your head and “pull down the curves.” If you have a more sports-oriented class, you can try using a batting average percentage and at-bat outcome example (if you had a .300 batting average and you struck out at your next at-bat [the marginal factor], your batting average is pulled down).
Start the experiment by defining that a day lasts for 1 minute. Get the class to keep time. On day 1, have 1 worker produce widgets. On day 2, have 2 workers, and so on. You’ll probably run for 10 to 12 days before you get to almost zero marginal product. Record the inputs and outputs in a table on the board. Have some fun with quality control, shirking, and cheating. The auditor must ensure that old widgets and partly made widgets don’t get used in a subsequent day. Each day must start clean. Now comes the assignment (Stage 1): Get the students to calculate marginal product and average product from the total product numbers that you’re recorded on the board. Get them to make graphs of the total product, marginal product, and average product curves. Get them to describe the curves and to explain their similarities with and differences to the curves for smoothies in the textbook. The first assignment covers only production. If you want, you can extend the experiment with another assignment (Stage 2): Use the data from your widget production experiment. Tell the students the cost of the capi240 tal and the wage rate of a worker. (Make up the numbers. Any will do.) Tell the students to calculate total cost, marginal cost, and average cost. Get them to make graphs of the total cost, marginal cost, and average cost curves. Get them to describe the curves and to explain their similarities with and differences to the curves for smoothies in the textbook. This assignment and the previous one make an outstanding assignment for credit or extra credit.
The grade point average versus marginal grade example (see slide 69) in the text is outstanding to use in class to describe how the marginal product and marginal cost curves relate to the average product and average cost curves. Once students can tell a story using the same intuition, they find drawing those curves much easier. While you have the curves drawn on the board or overhead, physically pull the average cost curves down (while marginal cost is below) or pull them up (when the marginal cost curve rises above). Use theatrics: raise your hands over your head and “pull down the curves.” If you have a more sports-oriented class, you can try using a batting average percentage and at-bat outcome example (if you had a .300 batting average and you struck out at your next at-bat [the marginal factor], your batting average is pulled down).
