Module 54: The Production Function

Key Economic Concepts For This Module: *A production function is the way in which inputs, both fixed and variable, are combined to produce output. • A fixed input is an input whose quantity cannot be easily changed for a period of time. Typical fixed inputs are land and capital. • A variable input is an input whose quantity can be easily changed at any time. Typical variable inputs are labor and raw materials. • The short run is a period of time too short to change the fixed inputs. The long run is a period of time long enough to vary all inputs. There are no fixed inputs in the long run. • The marginal product of an input is the additional output produced by using one more unit of that input. The marginal product is also the slope of the total product curve. • When more of a variable input (like labor) is added to a fixed input (like capital), the marginal product of the variable input eventually declines. This is usually referred to as the “principle of diminishing returns” to that input. 11/13/2018 10:44 AM

I. The Production Function How does a firm combine inputs (labor, capital, raw materials, land, etc) to get output? By way of a production function. . 11/13/2018 10:44 AM

I. The Production Function A. Inputs and Outputs Variable Inputs those that can be increased to increase production. Fixed Inputs those that cannot be increased in the near term to increase production. 11/13/2018 10:44 AM

I. The Production Function A. Inputs and Outputs Variable Inputs those that can be increased to increase production. Fixed Inputs those that cannot be increased in the near term to increase production. The short run is the time period that is too brief for a firm to alter its plant capacity. The capital, or plant size, is fixed in the short run. In the short run you can MAXIMIZE your fixed space with variable inputs like labor. 11/13/2018 10:44 AM

I. The Production Function A. Inputs and Outputs Variable Inputs those that can be increased to increase production. Fixed Inputs those that cannot be increased in the near term to increase production. The short run is the time period that is too brief for a firm to alter its plant capacity. The capital, or plant size, is fixed in the short run. The long run is a period of time long enough for a firm to change the quantities of ALL resources employed, including the capital plant size. 2007 1985 1963 11/13/2018 10:44 AM

I. The Production Function Production function and total product: Each worker should add more output (product) when they are hired. The marginal product of labor is the change in output / labor. 11/13/2018 10:44 AM

Marginal Product of Labor Diminishing marginal product of any input is a defining characteristic of production functions in the short run. As you add more labor to a fixed quantity of capital, the next worker contributes less and less to the total than the workers who came before. 11/13/2018 10:44 AM

Total Product, Marginal Product & the Fixed Input The difference between the two TP curves is the amount of fixed space (land). TP20 has 20 acres and TP10 has 10 acres. 11/13/2018 10:44 AM

Too Many Cooks in the Kitchen? Who has been yelled at on holidays for being in the kitchen? Why? With a fixed amount of space the main cooks are efficient if they are NOT blocked by others. Diminishing marginal product of labor! 11/13/2018 10:44 AM

Practice Question 1. A production function shows the relationship between inputs and a. fixed costs. b. variable costs. c. total revenue. d. output. e. profit. 11/13/2018 10:44 AM

Practice Question 2. Which of the following defines the short run?. a. less than a year b. when all inputs are fixed c. when no inputs are variable d. when only one input is variable e. when at least one input is fixed 11/13/2018 10:44 AM

Practice Question 3. The slope of the total product curve is also known as a. marginal product. b. marginal cost. c. average product. d. average revenue. e. profit. 11/13/2018 10:44 AM

Practice Question 4. Diminishing returns to an input ensures that as a firm continues to produce, the total product curve will have what kind of slope? a. negative decreasing b. positive decreasing c. negative increasing d. positive increasing e. positive constant 11/13/2018 10:44 AM

Practice Question 5. Historically, the limits imposed by diminishing returns have been alleviated by a. investment in capital. b. increases in the population. c. discovery of more land. d. Thomas Malthus. e. economic models. 11/13/2018 10:44 AM