U3 M54 Production Function + Simulation Slides

Inputs and Outputs

  • To earn profit, firms must make outputs

  • Input Resources are also called FACTORS

  • Total Physical Product (TP) total output or quantity produced

  • Marginal Product (MP) the additional output generated by additional inputs (workers)

    • account for signs

  • Average Product (AP): the output per unit of input

Fixed vs. Variable

  • Fixed Resources - resources that don’t change with the quantity produced

  • Variable Resources - resources that do change with the quantity produced

Law of Diminishing Marginal Returns

  • As variable resources (workers) are added to fixed resources (oven’s machinery, took, etc), the additional output produced from each additional worker will eventually fall.

Time Frames

  • Short run: Time period that is too brief for a firm to alter its plant capacity. The capital, or plant size, is fixed in the short run…or..at least 1 input is fixed and cannot be changed.

    • long enough such that output can vary, but plant capacity cannot.

  • Long run: Period of time long enough for a firm to change the quantities of all resources employed, including the capital plant size

  • Don’t get caught up with actual time frames!

Stages of Marginal Returns:

  1. Increasing MP, TP Increases

  2. Decreasing MP, TP Increases

  3. Negative MP, TP Decreases