Production and Costs

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Production and Costs
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Average and Marginal Product

• Marginal Product of LaborIncrease of Product
  when Employing an Additional Worker (? marginal
  benefit)
• Average Product of Labor or Product per
  WorkerTotal Product/Number of Workers

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Total, Marginal and Average Products
4
Total, Marginal and Average Products
Output
TP
Output per Worker
MPL
APL
Number of Workers
Number of Workers
L0
L1
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Average and Marginal Product

• Suppose that 5 bakers bake 500 cupcakes. The
  average product of labor is 100 (500/5).
• A new baker is employed and total output goes up
  to 630 cupcakes.
• The marginal product of adding an additional
  worker is 130. The new average product of labor
  is 630/6105.
• If the marginal product of labor is bigger than
  100, the average product of labor rises. If the
  marginal product of adding an additional worker
  is less than 100, the average product of labor
  falls.
• Then, the marginal product curve cross the
  average product curve when the average cost of
  labor is at the maximum.

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Costs (5 machines 10 per machine, wage is 15
per worker)
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• Average Costs (per unit cost)
• AVCVC/Q
• ACTC/Q
• If Labor is the only Variable Cost
• AVCVC/Q(PLL)/QPL/(Q/L)PL/APL
• Marginal Costs
• The increase in total cost when increasing
  production by 1 unit (not when increasing labor
  by 1 unit!).
• MCPL(1/MPL)
• One additional worker adds MPL to product. It is
  needed 1/MPL units of workers to produce one
  unit.

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Cost Curves
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Total and Variable Costs

TC
VC
Output
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Relationship Between Marginal and Average
Products and Costs
MCPL(1/MPL)
Output per Worker
MC
per unit of output
MPL
AC
AVC
APL
AVCPL/APL
Output
Number of Workers
L0
L1
Q1(L1)
Q0(L0)
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Average and Marginal Cost

• Suppose the total cost of producing 5 units is
  100. The average cost is 20. A new unit is
  produced and the total cost goes to 130.
• The marginal cost of producing an additional unit
  is 30. The new average cost is 130/625.
• If the marginal cost is bigger than 20, the
  average cost rises. If the marginal cost of
  producing an additional unit is less than 20, the
  average cost falls.
• Then, the marginal cost cross the average cost
  curve when the average cost of labor is at the
  minimum.

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Fixed Costs

Cost per unit of output
ATC
FC
AVC
AFC
Output
Output
13
Short Run and Long Run
Cost per Unit
AC long run
ACSR
Q
Output
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True or False

• ____ if 1000 acres of land can produce 3000
  bushels of corn, then 2000 acres can produce 6000
  bushels of corn and 3000 acres can produce 9000
  bushels of corn.
• ____ If the total benefits received from drug
  enforcement exceed its total costs, then the
  government should expand its drug enforcement
  activity.
• ____ Fixed costs have no effect on a firm's
  profit.

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• In each of the following 4 circumstances, what
  would happen to the price and quantity consumed
  of corn. Circle the correct answer.
• ____ 1.The price of fertilizer goes up.
• Price up down Quantity up
  down
• ____2.The price of wheat goes up.
• Price up down Quantity up
  down
• ____3.An epidemic wipes out half the population
  (people). Price up down Quantity
  up down
• ____4.The wages of industrial workers in the corn
  industry go up.
• Price up down Quantity up
  down

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• ____7. A firm's revenue can be calculated from
  its demand curve using the formula "price times
  quantity.
• ____9.If the demand for lettuce falls, the price
  will fall, causing the demand to go back up.

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• ____2. Which of the following would cause an
  increase in the price of video tape rentals?
• a.Movie theaters reduce their prices.
• b.The royalties paid to movie actors fall.
• c.The price of video cassette recorders (VCRs)
  increase.
• d.A nationwide video rental chain exits the
  market.

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• ____ 11. Consider the market for restaurant
  meals. Statistics show that wealthier families
  spend a greater proportion of their income on
  restaurant meals than do poorer families. If
  households' incomes rise substantially during an
  economic recovery, then we can expect
• a.an increased supply of restaurant meals.
• b.a lower price for restaurant meals.
• c.the demand curve for restaurant meals to shift
  to the left.
• d.an increased demand for restaurant meals.