1. AP Economics Mr. Bernstein Module 54: The Production Function November 2015

2. AP Economics Mr. Bernstein The Production Function The relationship between and firm’s inputs and outputs In general, the relationship is positive 2

3. AP Economics Mr. Bernstein Input and Output Variable Inputs: can be increased to increase production Fixed Inputs: cannot be increased in the near term to increase production The short run: at least one input is fixed. The time period that is too brief for a firm to alter its plant size (capital is fixed) The long run: all inputs may vary A period of time long enough for a firm to vary all inputs, including capital (ie plant size) Time of “long run” varies by firm 3

4. AP Economics Mr. Bernstein Total Product TP (or Q) Production function shows TP at various levels of a variable input or inputs (ie labor, raw materials) and fixed input (capital) Typically increases rapidly at first (ie as new workers are hired) but as opportunities to specialize have been implemented, will rise slower…and eventually turn downward 4

5. AP Economics Mr. Bernstein Marginal Product The additional output produced as a result of hiring one more unit of the input L MP L = (Δ Total Output)/(Δ Labor) MP C = (Δ Total Output)/(Δ Capital) MP = slope of TP curve TP curves demonstrate Diminishing Returns to Inputs As more and more of a variable input is added to a fixed input, the additional output produced will decline Not due to inferior quality of inputs 5

6. AP Economics Mr. Bernstein Total Product Presented Graphically MP can be diminishing but TP keeps rising until MP<0 6

7. AP Economics Mr. Bernstein Marginal Product Presented Graphically MP is diminishing, and therefore TP rising, until Q L ~= 6.5 7