Download To do today: short-run production (only labor variable)

To do today: short-run production (only labor
variable)
To increase output
with a fixed plant, a
firm must increase the
quantity of labor it
uses.
Short-run production: only labor variable
To increase output with a fixed plant, a firm must
increase the quantity of labor it uses.
How much will it use?
Requires
•  Total product (TP)
•  Marginal product (MP)
•  Average product (AP)
Consequences of the short run
 Add more labor to
increase output
 But can’t add more
capital goods
Graphing total product
Note similarity to
total utility!
Points A through H on
the curve correspond
to the columns of the
table.
The TP curve
separates attainable
points and
unattainable points.
Marginal product: note role of labor!
Marginal product (MP) : change in total product
from a one-unit increase in the quantity of labor
employed (Ql).
When the quantity of labor increases by more (or less)
than one worker, calculate marginal product as
MP
= Change in TP
÷ Change in Ql
Short-run Production: the pattern
Increasing
marginal
returns initially
Decreasing
marginal
returns
eventually
Negative
marginal
returns
where TP ê
Marginal returns: first increasing then decreasing
Increasing marginal returns: from increased
specialization and division of labor in the production
process.
Decreasing marginal returns: more and more workers
use the same equipment and work space.
‘Law” of decreasing marginal returns.
Average product
Like any average – total divided by the number of units
AP = TP ÷ Ql
Another name for average product is productivity.
Short run cost
Costs change with output depending on the shape of
three relationships
•  Total cost
•  Marginal cost
•  Average cost
Fixed and variable costs
Fixed examples: factory building (rent
or the mortgage payment), machines
(rent or the interest on loan used to
buy machines)
Variable examples: workers (wages),
electricity to run the machines,
office supplies like paper, raw materials
like dough and sauce for pizza.
Short run total cost
Total cost is the sum of total fixed cost
and total variable cost. That is,
TC = TFC + TVC
Remember for what comes next: Fixed
does not change with the level of output.
Graphing short run costs
.
TFC is constant—it
graphs as a horizontal
line.
TVC increases as
output increases.
TC then also increases
as output increases.
TFC in two places
The vertical distance
between the TC curve and
the TVC curve is TFC cost
Marginal cost (MC)
MC: change in total cost that results from a
one-unit increase in TP.
She produces one more widget:
MC is the cost of this additional
unit of output.
.
Average cost: three concepts (from TC)
Average fixed cost (AFC) is total fixed cost per unit
of output.
Average variable cost (AVC) is total variable cost
per unit of output.
Average total cost (ATC) is total cost per unit of
output.
Total and average cost conceps
The average cost concepts are calculated from the total
cost concepts as follows:
TC = TFC + TVC
Divide each total cost term by the quantity produced, Q, to
give
TC = TFC + TVC
Q
Q
Q
or,
ATC = AFC + AVC
Graphing cost curves
Average fixed cost (AFC)
decreases as output increases.
The average variable
cost curve (AVC) is U-shaped.
The average total cost curve
(ATC) is also U-shaped.
Relationships among cost curves
The vertical distance between
ATC and AVC curves is equal
to AFC, as illustrated by the
two arrows.
The marginal cost curve (MC)
is U-shaped and intersects
the average variable cost
curve and the average total
cost curve at their minimum
points.
Explaining the shape of the ATC
The shape of the ATC curve combines the shapes of
the AFC and AVC curves.
The U shape of the average total cost curve arises from
the influence of two opposing forces:
•  Spreading total fixed cost over a larger output
•  Decreasing marginal returns
Short run cost and product curves
As productivity decreases, costs rise.
This means that cost and product curves are
reverse sides of the coin.
The cost and product curve relationship graphically
MC curve is linked to its MP curve.
If MP rises, MC falls.
If MP is a maximum, MC is a minimum.
Cost and product curves
AVC linked to AP (average
product).
If AP rises, average variable cost
falls.
If average product is a maximum,
average variable cost is a
minimum.
Cost and product curves
At small outputs,
MP and AP é
MC and AVC ê
At intermediate outputs,
MP ê MC é
APé AVC ê
At large outputs,
MP and AP ê
MC and AVC é
Shifts in cost curves: what technology does
A technological change that increases productivity shifts
the TP curve upward.
It also shifts the MP curve and the AP curve upward.
Why? An advance in technology lowers the AC and MC
and so shifts the short-run cost curves downward.
Shifts: prices of factors of production
How the curves shift depends on which resource price
changes.
An increase in rent or another component of FC
•  Shifts the fixed cost curves (TFC and AFC) upward.
•  Shifts the total cost curve (TC) upward.
•  Leaves the variable cost curves (AVC and TVC) and
the marginal cost curve (MC) unchanged.
Shifts: variable costs
An increase in the wage rate or another component of
variable cost
•  Shifts the variable curves (TVC and AVC) upward.
•  Shifts the marginal cost curve (MC) upward.
•  Leaves the fixed cost curves (AFC and TFC)
unchanged.