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Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers.

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Presentation on theme: "Producer Decision Making Chapter 4. Production - a process by which resources are transformed into products or services that are usable by consumers."— Presentation transcript:

1 Producer Decision Making Chapter 4

2 Production - a process by which resources are transformed into products or services that are usable by consumers. Producer Decision Making

3 Decisions a Producer Must Make What to Produce? How Much to Produce? How to Produce? How Big to Be? Producer Decision Making

4 Resource (input) - A factor that can be used to produce a product that can satisfy a human want or desire. Producer Decision Making

5 Physical Relationships Land - everything you see in viewing the earth’s surface. Labor - physical act of performing a task. Management - the sole responsibility of decision making. Capital - every manufactured thing that can be used to aid or enhance production. Producer Decision Making

6 Different quantities and combinations of these four things will produce different amounts of the product. Producer Decision Making

7 Production Function Y = Output X = inputs (land, labor, capital, management) Function Y = f ( x1, x2, x3,..., xn ) This function is used to determine the level of output given the units of inputs. Producer Decision Making

8 Mapping a Production Function I II III IV Producer Decision Making

9 Constant Returns - if all inputs were increased in a constant ratio, the output will increase by the same percentage as the inputs. Producer Decision Making

10 Total Physical Product Curve TPP X Y TPP = Total Physical Product Producer Decision Making

11 X = 1 acre of land, $1000 of capital, 1 week of management time. 2 X = 2 acres of land, $2000 of capital, 2 weeks of management time. X produces 5 units of output 2 X produces 10 units of output Producer Decision Making

12 Law of diminishing returns - as successive amounts of a variable input are combined with a fixed input in a production process, the total product will rise, reach a maximum, then eventually decline. Changing the Level of One Input Producer Decision Making

13 Changing the Level of One Input Y TPP X1 X2, X3,...,Xn Producer Decision Making

14 Marginal Physical Product - the amount added to total physical product when another unit of the variable input is used. Changing the Level of One Input Producer Decision Making

15 Y TPP X1 X2, X3,...,Xn Change in Y Change in one unit of X Marginal Physical Product Producer Decision Making

16 Y TPP X1 X2, X3,...,Xn Or it could be measured at a point of Tangency.. Marginal Physical Product Producer Decision Making

17 Y TPP X1 X2, X3,...,Xn What is MPP Here? Marginal Physical Product Producer Decision Making

18 Y TPP X1 X2, X3,...,Xn What is MPP Here? Marginal Physical Product Producer Decision Making

19 MPP = Change in output TPP Y Change in input X1 == Marginal Physical Product Producer Decision Making

20 Average Physical Product Y TPP X1 X2, X3,...,Xn APP Producer Decision Making Change in Y Change in X

21 Y TPP X1 X2, X3,...,Xn Average Physical Product APP Producer Decision Making

22 Y TPP X1 X2, X3,...,Xn Average Physical Product APP Producer Decision Making

23 Average Physical Product APP Output Y Input X1 = = Producer Decision Making

24 Y X1 X2, X3,...,Xn Marginal and Average Product Curves Stage I Stage II Stage III APP MPP Producer Decision Making

25 Stage I Irrational As long as MPP > APP it will always be profitable to use more of that particular input. So because in Stage I MPP > APP everywhere, we will not produce in this region. Producer Decision Making

26 Y X1 X2, X3,...,Xn Marginal and Average Product Curves Stage I Stage II Stage III APP MPP Producer Decision Making

27 Stage II Rational In Stage II profit maximization will occur. APP > MPP everywhere, and production is still increasing with increases in inputs. Producer Decision Making

28 Y X1 X2, X3,...,Xn Marginal and Average Product Curves Stage I Stage II Stage III APP MPP Producer Decision Making

29 Stage III Irrational Stage III is irrational because as we increase the use of the input X1 output actually falls as a result. This cannot possibly be a profitable region of production. Producer Decision Making

30 Y X1 X2, X3,...,Xn Marginal and Average Product Curves Stage I Stage II Stage III APP MPP Y TPP X1 X2, X3,...,Xn Stage I Stage II Stage III Total Physical Product Curve

31 To determine the optimum level of an input, we need information about the value of the product and the cost of the input. Value of Product TVP = Price of Product * Amount of Product AVP = TVP / Quantity of Input (X1) MVP = Change in TVP / Change in Quantity of Input (X1) Producer Decision Making

32 $Y X1 X2, X3,...,Xn Marginal and Average Value Curves AVP MVP Producer Decision Making

33 Cost of the input Marginal Factor Cost - is the amount added to total cost when an additional unit of the variable input is used. MFC X 1 = Price X 1 Producer Decision Making

34 $Y X1 X2, X3,...,Xn Marginal and Average Value Curves AVP MVP MFC= P X 1 Optimal Input Usage. Producer Decision Making

35 Total Factor Cost TFC = Price X1 * Units of X1 used Producer Decision Making

36 $Y X1 X2, X3,...,Xn AVP MVP MFC= P X 1 Optimal Input Usage. Total Factor Cost TF C Producer Decision Making

37 Adjusting to Price Changes PRODUCT PRICE CAN CHANGE AND WILL INPUT PRICES CAN ALSO CHANGE Producer Decision Making

38 Changing the level of Product Price $Y X1 X2, X3,...,Xn AVP MVP MFC= P X 1 Optimal Input Usage TF C Increasing Output Price Producer Decision Making

39 Changing the level of Product Price $Y X1 X2, X3,...,Xn AVP MVP MFC= P X 1 Optimal Input Usage. TF C Increasing Output Price Producer Decision Making

40 $Y X1 X2, X3,...,Xn AVP MVP MFC= P X 1 Optimal Input Usage. TF C Changing the level of an input price An increase in MFC Producer Decision Making

41 $Y X1 X2, X3,...,Xn AVP MVP MFC= P X 1 Optimal Input Usage. TFC Changing the level of an input price An increase in MFC Producer Decision Making

42 Deriving the demand for an input Producer Decision Making Price of InputQuantity of Input

43 Product Price $ Quantity of Input Demand Producer Decision Making

44 $Y X1 X2, X3,...,Xn AVP MVP or Demand for X $ Demand for input from MVP Producer Decision Making

45 $Y X1 X2, X3,...,Xn AVP MVP or Demand for X $ Demand for input from MVP MFC = Px1 60 Producer Decision Making

46 $Y X1 X2, X3,...,Xn AVP MVP or Demand for X $ Demand for input from MVP MFC = Px1 60 Producer Decision Making

47 $Y X1 X2, X3,...,Xn AVP MVP or Demand for X $ Demand for input from MVP MFC = Px1 60 Producer Decision Making


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