Preview

Short RUn Prouder Theory and Profit Maximization

Good Essays
Open Document
Open Document
1323 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Short RUn Prouder Theory and Profit Maximization
Lecture Notes on Short-Run Producer Theory and Profit Maximization
Lalith Munasinghe

Production Functions
We begin with a few definitions. Firm: An organization that turns inputs into outputs.

Production Function (PF): The mathematical relationship between inputs and outputs. The PF is a technical relationship that specifies how much output can be produced from any possible combination of inputs.

Example: an automobile is an output made from a complex combination of a variety of inputs – labor, machines, steel, rubber, managerial labor, engineers, etc.

Our analysis is going to be based on a very simple technology: two inputs (denoted as K and L for capital and labor, respectively) and one output (denoted as Q). We represent this technology via a simple production function:

Q = f(K,L); so output is only a function of Capital (K) and Labor (L)

This relationship shows the maximum amount of output Q that can be produced from alternative combinations of K and L.

Short-Run Production
We begin our analysis of production functions with an even simpler problem by assuming that K is fixed. So the only thing that we can change to affect output is L. This simplification leads to the Short-Run analysis of production.

We start with three concepts of output related to labor input.
1. Total Product of Labor (TPL). The relationship between Q and L, holding K constant. Clearly it will be an increasing relationship. The more L you hire the more Q you will be able to produce.
2. Marginal Physical Product of Labor (MPL). The additional output produced by hiring one more unit of L, holding other inputs constant.
3. Average Physical Product of Labor (APL). Total output divided by total L employed, holding K constant. It is the ratio of output to labor – output per unit of labor. How much each unit of labor produces on average.

Now consider how these three concepts are linked to each other, and their relationship to the amount of labor (L) hired.

You May Also Find These Documents Helpful

  • Satisfactory Essays

    Econ 550 Assignment 1

    • 309 Words
    • 2 Pages

    Finally, the third stage of production is the phase when variable units are over utilized. At 15 units of labor the MP is negative. This is the rational stage of short term production this particular firm is…

    • 309 Words
    • 2 Pages
    Satisfactory Essays
  • Better Essays

    Bus 640

    • 1025 Words
    • 5 Pages

    Which inputs are fixed and which are variable in the production function of Jennifer Trucking Company? Over what ranges do there appear to be increasing, constant and/or diminishing returns to the number of drivers employed?…

    • 1025 Words
    • 5 Pages
    Better Essays
  • Satisfactory Essays

    12) Refer to Figure 22-1. Technological change is illustrated in the per-worker production function in the figure above by a movement from…

    • 1248 Words
    • 5 Pages
    Satisfactory Essays
  • Good Essays

    Economic Eqilibriums

    • 1183 Words
    • 5 Pages

    5.The production function for a competitive firm is Q = K.5L.5. The firm sells its output at a price of $10, and can hire labor at a…

    • 1183 Words
    • 5 Pages
    Good Essays
  • Good Essays

    econ 365 team

    • 639 Words
    • 2 Pages

    The relationships amongst productivity and the cost of production are the cost per day or the cost per hour associated to the productivity achieve within that day. In examining the two together, the productivity, which is the output for the total hours worked, is being compare to the total cost. This will show how much need to be made, and the total cost to make a product in order to reach a break-even analysis. Moreover, technological innovation leads to an improvement in productivity, which will have the effect on the cost of doing business or the activity, and will affect the prices of related…

    • 639 Words
    • 2 Pages
    Good Essays
  • Satisfactory Essays

    test 4

    • 1357 Words
    • 14 Pages

    If capital is fixed at two units, what is the marginal product of the fourth unit of labor?…

    • 1357 Words
    • 14 Pages
    Satisfactory Essays
  • Better Essays

    Each point (A,B,C,D and E) on the curve is a simulation of the maximum combination of T-shirts and Knitting machines that could be produced given all available resources are fully employed. The points inside the curve represents are attainable, but represents less than desireable output because there could be more of both goods if resources were fully utilized. The points outside the curve represents an unattainable but greater output because of the current availabilty of resources.…

    • 1292 Words
    • 6 Pages
    Better Essays
  • Better Essays

    Economics and Figure

    • 1710 Words
    • 7 Pages

    |4. |(Figure: Total Product) As units of labor are hired between quantities L1 and L2, ________ is ________ and ________ is ________.|…

    • 1710 Words
    • 7 Pages
    Better Essays
  • Good Essays

    1. Consider production in a two-input economy, with inputs L and K as usual, but without any substitution possibilities. Specifically, suppose that every unit of L requires exactly four units of K if output is to be increased. (If the firm hires another unit of L and less than four more units of K, then output does not increase. If the firm hires another unit of L and more than four more units of K, then output rises by the same as if just four more units of K were purchased with the new unit of L.) Suppose that L costs the firm $90 per unit employed and K costs the firm $180 per unit employed. Given cost minimizing employment of the inputs, output is given by: Q =3L½.…

    • 3075 Words
    • 11 Pages
    Good Essays
  • Good Essays

    Week 3 Assignment

    • 497 Words
    • 2 Pages

    a Which inputs are fixed and which are variable in the production function of William’s pizza shop? Over what ranges do there appear to be increasing, constant, and/or diminishing returns to the number of workers employed?…

    • 497 Words
    • 2 Pages
    Good Essays
  • Satisfactory Essays

    Eco 507 Midterm

    • 795 Words
    • 4 Pages

    In this equation, the firm should use K and L as given that ratio to minimize cost of production.…

    • 795 Words
    • 4 Pages
    Satisfactory Essays
  • Good Essays

    Applichem

    • 1098 Words
    • 4 Pages

    First, this paper will measure input Vs. output. Factories which generate higher output given the same input will rank higher. Inputs can have two dimensions of time and money. We will measure how much input is needed to produce a unit quantity in terms of time and money.…

    • 1098 Words
    • 4 Pages
    Good Essays
  • Powerful Essays

    Economics Ch 11 Quiz

    • 2765 Words
    • 12 Pages

    The increase in a firm's total revenue resulting from hiring an [additional] unit of labor or other variable resource.…

    • 2765 Words
    • 12 Pages
    Powerful Essays
  • Good Essays

    Big Push Theory

    • 375 Words
    • 2 Pages

    Each sector can either use a traditional or a modern technology. Using the traditional technology, one worker produces one unit of goods, so the sector would produce an amount equal to L/N. The modern sector requires F workers for administrative tasks, but the remaining workers produce more than one unit of goods per worker. This is depicted in the figures, where T is the production in the traditional sector an M the production in the modern sector. The way it is drawn, production is higher with modern than with traditional technology if we have L/N workers.…

    • 375 Words
    • 2 Pages
    Good Essays
  • Good Essays

    Marginal product is the change in quantity when one additional unit of input used, keeping all other inputs unchanged. Marginal product usually abbreviated MP, is found by dividing the change in total product by the change in the variable inputs.…

    • 804 Words
    • 3 Pages
    Good Essays

Related Topics