Transcript Short-run

Chapter 6
Supply
The Cost Side of the
Market
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Market: Demand meets Supply

Demand:
– Consumer
– buy to consume

Supply:
– Producer
– produce to sell
2
Recall: demand
willingness vs. ability to consume
 Willingness:
satisfaction (total
utility)
 Ability: budget
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similarly: supply
willingness vs. ability to produce

Willingness: produce to sell for profit
– Profit = total revenue – total cost
= PxQ - TC
– total production (Q) when P and C are
given

Ability: cost
（to pay for production factors）
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Recall:
Consumer Decision-Making

The goal: to maximize Total Utility
(willingness)
by choosing:
– the Optimal Quantities of goods and
services to consume

subject to: (ability)
– limited income
– market prices of the goods and services
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similarly:
Producer Decision-Making
The goal: to maximize Profit (willingness)
 by choosing:

– the Optimal Quantities of goods and
services to produce

subject to: production cost (ability)
– inputs
– prices of inputs
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The goal for producers

Maximize profit
 Profit = price of output x quantity produced
- production cost
 Price of output:
– determined by market (not affected by single
producer in perfectly competitive market)

Production cost: determined by
– quantity of input based on quantity of output
produced and technology applied
– Input prices
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The Production Function
the
relationship between
the quantity of inputs a
firm uses and the quantity
of output it produces.
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Inputs (Production Factors)
Resources used in the production process
 labor (L)
 capital (K)
 natural resources (N)
 entrepreneurship (E)
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Inputs: Fixed vs. Variable

Fixed input:
– the level of its usage cannot be readily changed
(the level of its usage does not change along with
level of output)
– An input whose quantity cannot be altered in the
short run

Variable input:
– the level of its usage may be readily changed (the
level of its usage changes along with the level of
output)
– An input whose quantity can be altered in the
short run
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Short-run vs. Long-run

Short-run:
– the period of time in which at least one
input is fixed.
– A period of time sufficiently short that at
least some of the firm’s factors of
production are fixed

Long-run:
– the period of time in which all inputs are
variable.
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Production Function
Q = f (L, K, N, E)
 A relationship between inputs and
outputs, assuming technical efficiency.

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Technical Efficiency

The maximum level of output is
obtained from a given combination of
inputs
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Economic Efficiency

A given amount of output is produced
using the combination of inputs that
costs the least (at minimum cost)
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Short-Run Production:
some inputs are fixed

Total Product:
Q = f (L, K, N, E)
 Usually assume N and E given
 Total Product of Labor:
Q = f (L)
(K, N, E fixed)
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TP Curve: Total Product
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Recall: Sarah’s Total Utility from
Ice Cream Consumption
Figure 5.2, p.130
Based on table 5.1,
p.129
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Recall: Diminishing Marginal Utility for
Sarah from ice-cream
Figure 5.3, p. 131
Based on Table 5.2, p.130
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MP: Marginal Product

The marginal product of an input is the
additional quantity of output that is
produced by using one more unit of that
input.
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TP Curve: Total Product
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Marginal Product of Labor Curve
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Diminishing Returns to an Input
(diminishing marginal product)
diminishing returns to an input:
an increase in the quantity of an input
leads to a decline in the marginal
product of that input, holding the levels
of all other inputs fixed
 Other things held constant, as more of a
variable input is used in production, its
marginal productivity will decline after a
certain point.

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Recall: Key Points for Sarah’s example

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TU first increases then max out and starts to
decrease
TU increases at a slower pace
TU is maximized when MU=0
MU is decreasing but positive when TU is
increasing
MU is decreasing and negative when TU is
decreasing
MU = 0 when TU is maximized
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similarly:






TP first increases then max out and starts to
decrease
TP increases at a slower pace
TP is maximized when MP=0
MP is decreasing but positive when TP is
increasing
MP is decreasing and negative when TP is
decreasing
MP = 0 when TP is maximized
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Total Product, Marginal Product,
and the Fixed Input
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Short-Run Production:
some inputs are fixed
Total Product: Q = f (L, K, N, E)
 Total Product of Labor:
Q = f (L)
(K, N, E fixed)
 Marginal Product of Labor:
MPL= dQ / dL
 Average Product of labor: APL=Q/L

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Short-Run Production:
Q, AP, MP, and shift in Q
L\K
1
2
3
1
25
55
83
2
3
52 74
112 162
170 247
4
5
90 100
198 224
303 342
4
108
220 325
400 453
5
125
258 390
478 543
6
137
286 425
523 598
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K=1
L
TP=Q
MP
AP
1
25
25
25
2
55
30
22.5
3
83
28
27.7
4
108
25
27
5
125
17
25
6
137
12
22.8
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Production: one input
TP = Q = f(L,K,N,E)
 When K,N,E fixed: SR
 TP(L) = f (L)
 AP(L) = TP(L) / L
 MP(L) = dTP(L) /dL
 MP is the slope of TP
 TP maximized when MP = 0

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Short-Run Production: Summary
L=0 leads to Q=0
 when MP is increasing, Q is increasing
at an increasing rate
 when MP is decreasing, Q may still
increase but at a decreasing rate
 When MP=0, Q stop increasing and
start decreasing (Q is maximized).
 AP reaches its maximum when AP=MP

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Q
MP>AP
AP
MP<AP
AP
MP<0
TP
F
MP=0
TP Max
Ⅰ
Ⅱ
TP
Ⅲ
MP=AP
AP Max
E
AP
0
A
B
L
MP
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