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ninth edition
Thomas Maurice
Chapter 8
Production & Cost in the Short Run
McGraw-Hill/Irwin McGraw-Hill/Irwin Managerial Economics, 9e Managerial Economics, 9e
Copyright 2008 by the McGraw-Hill Companies, Inc. All rights reserved.
Managerial Economics
Technical efficiency
Achieved when maximum amount of output is produced with a given combination of inputs
Economic efficiency
Achieved when firm is producing a given output at the lowest possible total cost
8-2
Managerial Economics
Fixed input
An input for which the level of usage cannot readily be changed and which must be paid even if no output is produced An input employed in a fixed amount for any positive level of output that need not be paid if output is zero
Quasi-fixed input
8-3
Managerial Economics
Long run
All inputs are variable Output changed by varying usage of all inputs
8-4
Managerial Economics
Q f ( L,K ) f ( L )
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Marginal product of labor MP = Q/L When AP is rising, MP is greater than AP When AP is falling, MP is less than AP When AP reaches it maximum, AP = MP Law of diminishing marginal product
As usage of a variable input increases, a point is reached beyond which its marginal product decreases
8-6
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1
2 3 4
52
112 170 220
5
6 7 8 9 10
8-7
258
286 304 314 318 314
10
4 -4
35.3
31.4
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8-8
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Panel A
Q0
Total product
L0
L1
L2
Panel B
Average product
L0
L1
L2
Marginal product
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Managerial Economics
8-11
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8-12
Managerial Economics
Average Costs
Average variable cost ( AVC )
TVC AVC Q
Average fixed cost ( AFC ) TFC AFC Q Average total cost ( ATC ) TC ATC AVC AFC Q
8-13
Managerial Economics
8-14
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100
200 300 400
500
600
8-15
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8-16
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8-17
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AVC is U-shaped
Equals SMC at AVCs minimum
ATC is U-shaped
Equals SMC at ATCs minimum
8-18
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8-19
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8-20
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8-21
Managerial Economics