THE PRODUCTION FUNCTION

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Production and Cost Analysis I

Long Run Production With Variable Inputs:

The long run is the lengthy period of time during with all inputs can be varied. There are no fixed output in the long run. All factors of production are variable inputs. We now analyze production function by allowing two factors say labor and capital to very while all others are held constant. With both factors are variable, a firm can produce a given level of output by using more labor and less capital or a greater amount of capital and less labor or moderate amounts of both. A firm continues to substitute one input for another while 2 continuing to produce the same level of output.

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SHORT RUN VS. LONG RUN

The short run is defined as the period of time when the plant size is fixed. The long run is defined as the time period necessary to change the plant size. Duration of the long/short run depends on the production process

Plant size is fixed, labor is variable Both Plant size and labor are variable
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SHORT RUN VS. LONG RUN

Plant size is Short Run fixed, labor is variable To increase Short Run production firms increase Labor but cant expand their plant 5 Firms produce in the short run

SHORT RUN VS. LONG RUN

Long Run How can the plant size be Long Run variable?

Plant size is variable, labor is variable To increase production firms increase Labor and expand their plant.
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Firms plan in the long run

THERE ARE THREE IMPORTANT WAYS TO MEASURE THE PRODUCTIVITY OF LABOR:

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Total

product (TP) Average product (AP) Marginal product (MP)

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TOTAL PRODUCT FUNCTION (TP)

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Represents

the relationship between the number of workers (L) and the TOTAL number of units of output produced (Q) holding all other factors of production (the plant size) constant.
For

a coffee shop, output would be measured in number of coffee cups a day For a steel mill, output would be measured in tons of steel produced a day

BUILDING A TOTAL PRODUCT GRAPH

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The Total Product Curve must show that: 1. The more workers are hired the more output would be produced. INCREASING FUNCTION.
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75 25 50 20 30 15 15 5
5

Increasing Slope Increasing

ALL workers become more productive as they concentrate on doing only one task

10 1 2 3 4 5

75 70 60 45

10 15 20

Decreasing Slope Decreasing

ALL workers become LESS productive as the plant gets crowded and equipment breaks down often

25 25

itive Increasing and Positive Decreasing S

Increasing
5 10 15

Decreasing

125 120 110 95

20

75
25

50
20

30 15 5 1
15 10 5

10

Positive Increasing, Positive Decreasing and Negative Slope

125 120 110 95
20 5 10 15

-5

-10 -15

75
25

50
20

30 15 5
15 10

5 2

10 11 12

QALL THREE FUNCTIONS ARE INCREASING. Q Same size steps Larger steps Constant Slope Increasing Slope

L As L increases, Q increases by the same amount Q

As L increases, Q increases by increasing amounts Smaller steps Decreasing Slope As L increases, Q increases by decreasing amounts L

FOR MOST PRODUCTION PROCESSES

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In

the short run, the plant size is fixed. Adding more workers is favorable to production at first, as specialization increases productivity. Eventually, adding more and more workers to a FIXED PLANT size results in decreases in productivity due to crowded conditions:
Workers

will have to SHARE EXISTING EQUIPMENT Equipment will break down more often.

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As more of a variable input (labor) is added to a fixed input (plant), additions to output eventually slow down.

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THE LAW OF DIMINISHING MARGINAL PRODUCT.

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If more of the variable input (labor) continues to be added to a fixed input (plant), additions to output continue to decline until eventually output decreases

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NEGATIVE MARGINAL PRODUCT

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CHOOSING THE SLOPE:

For most productions processes as we add more workers, additions to output increase at the beginning but eventually decrease (could become negative). For this, we combine the graph with increasing steps (slope) and the graph with decreasing stepscommon The most
2.
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production function has an increasing slope at the beginning, and eventually decreasing slope which may

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MARGINAL PRODUCT (MP)

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The additional output that can be produced by adding one more worker while holding plant size constant. MP = Q/L Is the slope of the Total Product Function

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MP: SLOPE OF THE PRODUCTION FUNCTION

Q (units
produced)

Slope = 30/1 = 30 MP = 30
TP(Q)
The 10th worker adds 30 units to production

160 units Rise Q 30 units 130 units Run L

10

L (Workers hired)

MP: SLOPE OF THE PRODUCTION FUNCTION Slope = 30/3 = 10

MP = 10
TP

160 units 130 units

30

Rise Run

Each one of these three workers adds 10 units to production

3
9 12
L

MP INCREASES AND DECREASES WHILE TOTAL PRODUCT STILL RISING

If more workers are added, MP turns NEGATIVE
Q
25 27 23 2 -4

MP MP = 12 MP = 8

20

5 12
MP = 5

8
1 1st 2nd 2 3rd 3 4th 4 5th 5 1 2 3

MP = 2
5 4

MP = -4

TOTAL PRODUCT VS. MARGINAL PRODUCT

Q
25 27 23

MP MP = 12 MP = 8 MP = 5 MP = 2
1 2 3 4 5 MP = -4
1 2 3 4

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TOTAL PRODUCT VS. MARGINAL PRODUCT

Q
25 27 23 TP rises up to 4th worker TP falls after 4th worker MP rises up to 2nd worker MP MP falls after to 2nd worker MP becomes negative after 4th worker

MP = 12 MP = 8 MP = 5 MP = 2
1 2 3 4 5 MP = -4
1 2

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L 0 1 2 3 4 5 6 7 8 9
the 11

MP 5 10 15 20 25 30 35 40 45

L 0 1 2 3 4 5 6 7 8 9
the 11

MP

Q 0 60 115 165 210 250 285 315 340 360

10this table: 50 given In youre

Marginal 55 Product and you must use it to calculate 12 the Total 60 Product.

10In this table: youre given 375

Total Product and you 385 must use it to calculate the 12 Marginal Product. 390

AVERAGE PRODUCT (AP)

Represents the amount of output produced by each worker on average. Or Output per worker.
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OUTPUT PER WORKER

Slope of that ray= Q/L = AP Q

150 units
If we draw a line (a ray) from the origin to a point on the production function

When 10 workers produce 150 units,

Output per worker = 15 units TP

Rise Q

AP = Q/L AP = 150/10 = 15

Run L

10

AP = Q/L What happens to What ORIGIN AP = SLOPE the AP RAY FROMhappensLto OF as L increases? the slope as
Q
increases?

Q L AP 5 5 1.00 TP 20 10 2.00 30 12 2.50 70 16 4.38

82 80 70

30 20 5

80 20 4.00 82 23 3.57 L
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10 12 16 20 23

AP: INCREASES, REACHES A MAXIMUM AND DECREASES.

AP AP Increases up to 16 workers
70/16 =4.38

AP Decreases after L=16

Q L AP 5 5 1.00 20 10 2.00 30 12 2.50 70 16 4.38 80 20 4.00 82 23 3.57 L L

16

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THE RELATIONSHIP BETWEEN AP AND MP

IfIfthe MP of the next worker is say 70 > your next grade is say 70 > your test If MP (70) > AP (60), then the per worker average so far say 60, test average so far say 60, then your then Average Product increases. the per worker average (AP) increases. Average increases. If MP (50) < AP (60), then the AP Ifwill decrease. is worker is your50 < Ifthe MP of the next say 50 < say test your next grade If MP = AP, then so far say 60, then per worker average 60, then is not average so far say the AP your test increasing or decreasing: it is at the per worker average (AP) decreases. Average decreases. the maximum point. your next grade is 60 = your test IfIfthe MP of the next worker is say 60 = per average so far so then your then the per worker average 60,far say 60, test Average 30 stays the same(AP) stays the same. . worker average

THE AP AND MP
TP Slope of ray is max

Changes concavity L MP,AP MP is max AP is max AP

MP

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MP AND AP
Suppose that 8 workers produce a total of 35 units So when the 9th worker is hired 9 workers produce a total of 45 units

MPAP

10 Marginal product of 9th worker = 10

4.4
AP

s se a re inc

AP MP
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AP of 9 workers = 45/9=5 9 9 8 AP of 8 workers =

MP AND AP
Suppose that 12 workers produce a total of 71 units So when the 13th worker is hired 13 workers produce a total of 76.9 units

Suppose that MP = AP: Marginal product of 13th worker = 5.9 MPAP

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5.9

MP=5.9 5.9 5.9

AP remains same

AP MP

12 13 33 AP of 13 workers = 76.9/13 = AP of 12 workers = 71/12

MP = AP, AP MPAP 70 doesnt change 70 and AP AP is max MP above AP de cr es ea as se 60 cre s in 60 AP AP MP below AP MP

RELATIONSHIP BETWEEN MP AND AP

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Questions to practice for the test

For each table in the next slides answer the following questions: 1. What is the shape of the Total Product Curve? Should be able to draw the total product curve. 2. What is the shape of the Marginal Product Curve? Should be able to draw the Marginal Product Curve. 3. What is the shape of the Average Product Curve? Should be able to draw the Average Product Curve. 4. With which worker(s) do we realize increasing/decreasing/negative marginal productivity? How do you know? 5. Would you employ the 6th worker? Why yes/why not? 6. How are the marginal product and the average product related?