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Production and Costs. Average and Marginal Product Marginal Product of Labor=Increase of Product when Employing an Additional Worker (≠ marginal benefit)

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Presentation on theme: "Production and Costs. Average and Marginal Product Marginal Product of Labor=Increase of Product when Employing an Additional Worker (≠ marginal benefit)"— Presentation transcript:

1 Production and Costs

2 Average and Marginal Product Marginal Product of Labor=Increase of Product when Employing an Additional Worker (≠ marginal benefit) Average Product of Labor or Product per Worker=Total Product/Number of Workers

3 Total, Marginal and Average Products LaborTotal ProductMarginal ProductAverage Product 1 (worker)5 (dresses)5 (d. added by additional worker) 5 (d.p.w.)

4 Total, Marginal and Average Products Number of Workers Output Number of Workers Output per Worker L0L0 L1L1 TP MPL APL Gains of Specialization Diminishing Marginal Returns Q L

5 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 630/6=105. If the marginal product of labor is larger 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.

6 Costs (5 machines $10 per machine, wage is $15 per worker) LaborTotal Product Variable Cost Total Costs

7 Average Costs (per unit cost) AVC=VC/Q AC=TC/Q If labor is the only Variable Input: Variable Cost AVC=VC/Q=(P L *L)/Q=P L /(Q/L)=P L /APL Marginal Costs The increase in total cost when increasing production by 1 unit (not when increasing labor by 1 unit!). MC=P L *(1/MPL) One additional worker adds MPL to product. It is needed 1/MPL units of workers to produce one unit of the product.

8 Cost Curves LaborProductMPLAPLVCTCAVCACMC (1/5)*

9 Total and Variable Costs Output $ TC VC

10 Relationship Between Marginal and Average Products and Costs Output $ per unit of output Number of Workers Output per Worker L0L0 L1L1 MC MPL APL AC AVC Q 1 (L1) Q 0 (L0) MC=PL*(1/MPL) AVC=PL/APL

11 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 130/6=25. If the marginal cost is larger 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.

12 Fixed Costs Output $ Cost per unit of output AFC AVC ATC FC

13 Short Run and Long Run Output Cost per Unit ACSR AC long run Q*


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