AP Microeconomics

Production Function: the way a firm combines inputs to produce an output

Types of Inputs:

• Fixed Inputs: inputs that cannot be changed in the short run to change production

• Variable Inputs: inputs that can be changed in the short run to change production

Short Run: the period of time during which there are fixed inputs; the period of time too short for a firm to alter its plant capacity

                Plant capacity: a firm’s maximum potential level of production

Long Run: the period of time long enough for a firm to change all of its inputs; the period of time long enough for a firm to alter its plant capacity

Measuring Production

Total Product (TP): the total quantity of output produced by a certain amount of inputs

Marginal product (MP): the additional output produced by one more unit of a variable input, often labor

(L is equal to labor.)

MP(L) = change in TP / L

Average Product (AP): the average quantity of output produced by one unit of a variable input, often labor

AP(L) = TP/L

MP increases initially—specialization

Why? Division of labor

Then MP decreases - diminishing returns

Why? Always happens in the short run because more and more of the variable inputs are being added to a fixd amount of fixed inputs