The Production Function Chapter 13

Firm Behavior Firm’s have an economic goal to maximize profits Profits = Total Revenue – Total Costs

Production Function Production function- the relationship between Qty of inputs and Qty of output Production Function Inputs: Labor Capital Natural Resources Entrepreneurial Talent OUTPUT Known as Total Product

Measuring Output Marginal product - the increase in output that arises from one additional unit of input Add 1 worker Gain 5 more computers

Law of Diminishing Marginal Returns As you increase inputs—beyond some point----marginal product begins to decline Example: As more and more workers are hired => each additional worker contributes less to production

Number of Workers Hired Quantity of output As marginal product declines, the production function becomes flatter The slope of the production function measures the marginal product of the next input Total Product

Production Function Inputs Output.

Worksheet #1 Lesson 2, Activity 25 pg. 131