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Dr. Agyapomaa
Gyeke-Dako
04/11/16
People
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Firms
04/11/16
Production Function
A production
function describes the
relationship between a
flow of inputs and the
resulting flow of
outputs in a production
process during a given
period of time.
Q = f(L, K, M, )
where
Q = quantity of output
L = quantity of labor input
K = quantity of capital
input
M = quantity of materials
input
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input is an
input whose quantity
a manager cannot
change during a
given period of time.
A variable
input is an
input whose quantity
a manager can
change during a
given period of time.
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Total Product
The
total quantity of
output produced with
given quantities of
fixed and variable
inputs.
TP or Q = f(L, K ), where
TP or Q = total product
or total quantity
produced
L = quantity of labor
input (variable)
K = quantity of capital
(fixed)
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Average Product
The
amount of output
per unit of variable
APL = TPL or QL,
input.
where
APL = average product
of labor
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Marginal Product
The
additional output
produced with an
additional unit of
variable input.
10
MPL = TPL or
QL
where
MPL = marginal
product of labor
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TP
10
14
10
35
10
62
10
91
10
4.5
106
10
121
10
150
10
6.75
170
10
175
10
197
10
212
10
10
217
1110
11
211
Dr. Agyapomaa Gyeke-Dako
AP
MP
04/11/16
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13
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Stage I
Stage II
Stage III
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Cost Function
A mathematical
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Opportunity Cost
The
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18
A cost is explicit if it is
reflected in a payment
to another individual,
such as a wage paid to
a worker, that is
recorded in a firms
bookkeeping or
accounting system.
Profit
The
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profit is
the difference
between total
revenue and total
cost where cost
includes only the
explicit costs of
production.
20
Economic
profit is the
difference between
total revenue and
total cost where cost
includes both the
explicit and any
implicit costs of
production.
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21
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22
Variable
cost is the
total cost of using
the variable input,
which increases as
more output is
produced.
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DEFINITION
Total cost
Average fixed cost
Average variable cost
Average total cost
TC = TFC + TVC
AFC = TFC Q
AVC = TVC Q
ATC = TC Q = AFC + AVC
Marginal cost
MC = TC Q = TVC Q
Dr. Agyapomaa Gyeke-Dako
04/11/16
Example
PK = 50 and PL = 100
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TP =
Q
10
10
14
10
35
10
62
10
91
10
121
10
150
10
175
10
197
10
212
10
10
217
TFC
TVC
TC
AFC
AVC
ATC
MC
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25
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Q
Q
PL L
L
PL
Q
Q
PL
PL
Q
MPL
L
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TVC PL L
AVC
Q
Q
PL
APL
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Q1
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Q2
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Revenue
TR P Q
dTR
MR
dQ
TR P Q
AR
P
Q
Q
Draw the curves
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REVENUE
Defining
Revenue
REVENUE
Revenue
Shifts
in revenue curves
PROFIT MAXIMISATION
stage 1:
stage 2:
PROFIT MAXIMISATION
Some
qualifications
What
if a loss is made?
loss minimising:
P = AVC
P = LRAC
Profit Maximization
TR TC
d
0
dQ
d dTR dTC
0
dQ dQ dQ
MR MC 0
MR MC
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Profit Maximization
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Profit-maximising output
Dr. Agyapomaa Gyeke-Dako
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A production function
showing the relationship
between a flow of inputs
and the resulting flow of
output, where all inputs
are variable.
Q = f(L, K)
where
Q = quantity of output
L = quantity of labor input
(variable)
K = quantity of capital input
(variable)
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Input Substitution
choice
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Capital-intensive method
of production is a
process that uses large
amounts of capital
equipment relative to the
other inputs to produce
the firms output.
Labor-intensive method
of production is a
process that uses large
amounts of labor relative
to the other inputs to
produce the firms
output.
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SRAC4
SRAC3
LRAC
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Economies of scale
exist when the firm can
achieve lower unit costs
of production by
adopting a larger scale
of production,
represented by the
downward sloping
portion of along-run
average cost curve.
Diseconomies of scale
exist when the firm
incurs higher unit costs
of production by
adopting a larger scale
of production,
represented by the
upward sloping portion
of a long-run average
cost curve.
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SATC1
LRAC
SATC2
Diseconomies of scale
Increasing LRAC
Economies of scale
Declining LRAC
Q1
45
Q
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Learning By Doing
The
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LRAC
MES
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Q
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