Ch7_Behind+Supply

Chapter 7: Behind Supply

Learning Objectives

• Connect changes in output to changes in input usage.
• Connect changes in costs to changes in input usage.
• Demonstrate connections between outputs and input usage in graphs.

7.1: Inputs and Outputs

Factors of Production

• Labor:
  • The application of physical and mental skills that individuals have.
• Land:
  • Refers to actual space or natural resources.
• Capital:
  • Includes machines, tools, buildings, software, and inventories.

Production Function

• Definition:

  • A mathematical function that illustrates the maximum possible output for any combination of inputs with a specific technology.
  • Formula:
    ext{Output} = f( ext{labor}, ext{capital}, ext{land})

• Example:

  • Patty's Pages’ production function for web page development shows how the inputs (size of the office, amount of equipment, number of employees) impact the number of web pages developed.

Short Run Production Process

• Description:
  • Begins with a simple production process with only two inputs: labor and capital.
  • Starts with a fixed amount of capital equipment in the short run.

Definition of Short Run

• Short Run:

  • A time frame where at least one input, or factor of production, remains fixed.
  • It is a brief period during which a firm cannot adjust all inputs.

• Examples of Fixed Variables in the Short Run:

  • Office space (e.g., a lawyer rents office space).
  • Factory (e.g., a manufacturer builds a factory).

7.2: Marginal and Average Product

Total Product

• Total Product (TP):
  • The total amount of output produced.

Example Table - Total Production as a Function of Workers

• Table 7.1:
  

• Figure 7.3:
  • Graph illustrating total production as a function of the number of workers, showing that the slope becomes less steep as more workers are added.
  • As labor increases, total output increments get smaller (typical characteristic of the short-run production function).

Long Run vs. Short Run

• Long Run:
  • A time period sufficient for all inputs to be adjusted.
  • Variables that can change include:
  • Amount of labor
  • Amount of capital
  • Technology utilized
  • Effectiveness of labor in producing web pages.

Technological Change

• Definition:
  • Refers to a shift in the production function, typically enhancing the output available at each input level.
  • May arise from:
  • New product creation.
  • Redesign of existing products.
  • New manufacturing methods.

Graphical Representation of Total Product

• Figure 7.4:
  • Shift in total product function with new technology, which increases output for each input level.
  • Original curve versus curve when technology fails (computer crashes) shows lower output due to reduced input efficiency.

Marginal Product

• Marginal Product (MP):
  • Represents the change in output resulting from a one-unit change in a particular input, while other inputs remain constant.

Algebraic Representation of Marginal Product

• Formula: MP = \frac{\Delta TP}{\Delta L}
  • Where $
    abla$ denotes the change in total product (TP) when