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THE PRODUCTION FUNCTION

1

Production and Cost Analysis I

A PLANT
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Is

the factory (space) where production takes place and All the equipment necessary to produce The plant includes everything needed to produce, except workers and raw materials.
2

SHORT RUN VS. LONG RUN

The short run is defined as the period of time when the plant size is fixed. The long run is defined as the time period necessary to change the plant size. Duration of the long/short run depends on the production process

Plant size is fixed, labor is variable Both Plant size and labor are variable
3

SHORT RUN VS. LONG RUN

Plant size is Short Run fixed, labor is variable To increase Short Run production firms increase Labor but cant expand their plant 4 Firms produce in the short run

SHORT RUN VS. LONG RUN

Plant size is Long Run variable, labor is variable How can To increase the plant Long Run production firms size be increase Labor variable? and expand their plant. 5 Firms plan in the long run

THERE ARE THREE IMPORTANT WAYS TO MEASURE THE PRODUCTIVITY OF LABOR:

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Total

product (TP) Average product (AP) Marginal product (MP)

TOTAL PRODUCT FUNCTION (TP)

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Represents

the relationship between the number of workers (L) and the TOTAL number of units of output produced (Q) holding all other factors of production (the plant size) constant.
For a coffee shop, output would be measured in number of coffee cups a day For a steel mill, output would be measured in tons of steel produced a day

BUILDING A TOTAL PRODUCT GRAPH

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The Total Product Curve must show that: 1. The more workers are hired the more output would be produced.

INCREASING FUNCTION.
8

Number of units of output produced

Constant Slope

25

20
15

5 5 5

10 5

5
5 0 1
Number of Workers hired

75 25 50
20

Increasing Slope

30
15 15 5
5

ALL workers become more productive as they concentrate on doing only one task

10

75 70 60 45

10 15

Decreasing Slope
ALL workers become LESS productive as the plant gets crowded and equipment breaks down often

20
25 25

Positive Increasing and Positive Decreasing Slope

Increasing
5 10 15

Decreasing

125 120 110 95

20

75
25

50
20

30 15 5 1
15 10 5

10

Positive Increasing, Positive Decreasing and Negative Slope

125 120 110 95
20 5 10 15

-5

-10 -15

75
25

50
20

30 15 5
15 10

5
2

10 11 12

ALL THREE FUNCTIONS ARE INCREASING. Q Same size steps Larger steps Constant Slope Increasing Slope

L As L increases, Q increases by the same amount Q

L As L increases, Q increases by increasing amounts Smaller steps

Decreasing Slope
As L increases, Q increases by decreasing amounts L

WHICH OF THESE THREE SHAPES

BEST DESCRIBES WHAT IS COMMON TO MOST PRODUCTION PROCESSES?
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15

In other words: Does each additional worker add the SAME? MORE? Or LESS to output that the previous worker?

FOR MOST PRODUCTION PROCESSES

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In

the short run, the plant size is fixed. Adding more workers is favorable to production at first, as specialization increases productivity. Eventually, adding more and more workers to a FIXED PLANT size results in decreases in productivity due to crowded conditions:

Workers will have to SHARE EXISTING EQUIPMENT Equipment will break down more often.

16

As more of a variable input (labor) is added to a fixed input (plant), additions to output eventually slow down.

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THE LAW OF DIMINISHING MARGINAL PRODUCT.

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If more of the variable input (labor) continues to be added to a fixed input (plant), additions to output continue to decline until eventually output decreases

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NEGATIVE MARGINAL PRODUCT

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CHOOSING THE SLOPE:

2. For most productions processes as we add more workers, additions to output increase at the beginning but eventually decrease (could become negative). For this, we combine the graph with increasing steps (slope) and the graph with decreasing steps The most common production function has an increasing slope at the beginning, and eventually decreasing slope which may become negative
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MARGINAL PRODUCT (MP)

The additional output that can be produced by adding one more worker while holding plant size constant. MP = DQ/DL Is the slope of the Total Product Function

20

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MP: SLOPE OF THE PRODUCTION FUNCTION

Q (units
produced)

MP = 30
30 units Rise DQ

Slope = 30/1 = 30
TP(Q)
The 10th worker adds 30 units to production

160 units 130 units

Run DL

10

L (Workers hired)

MP: SLOPE OF THE PRODUCTION FUNCTION Slope = 30/3 = 10

Q

MP = 10
TP

160 units

30
130 units

Rise
Run

3
9 12

Each one of these three workers adds 10 units to production

MP INCREASES AND DECREASES WHILE TOTAL PRODUCT STILL RISING

If more workers are added, MP turns NEGATIVE

MP
25 27 23 2 -4

MP = 12 MP = 8

20

5 12
MP = 5

8
1 2 3 4 5 1st 2nd 3rd 4th 5th
1 2 3

MP = 2
5 4

MP = -4

TOTAL PRODUCT VS. MARGINAL PRODUCT

MP
27 25 23

MP = 12

20

MP = 8 MP = 5 MP = 2
1 2 3 4 5

MP = -4

TOTAL PRODUCT VS. MARGINAL PRODUCT

TP rises up to 4th worker 27 25 23 MP rises up to 2nd worker MP MP falls after to 2nd worker MP becomes negative after 4th worker

TP falls after 4th worker

MP = 12

20

MP = 8 MP = 5 MP = 2
1 2 3 4 5

MP = -4

L 0 1 2 3 4 5

MP 5 10 15 20 25

L 0 1 2 3 4 5

MP

Q 0 60 115 165 210 250

6 30 7 35 8 40 9 45 10 In this table: 50 youre given the Marginal 55 Product and 11 you must use it to calculate Product. 12 the Total 60

6 285 7 315 8 340 9 360 10In this table: youre given 375 the Total Product and you 11 385 must use it to calculate the 12 Marginal Product. 390

AVERAGE PRODUCT (AP)

Represents the amount of output produced by each worker on average. Or Output per worker.

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OUTPUT PER WORKER

Slope of that ray= Q/L = AP Q

When 10 workers produce 150 units,

Output per worker = 15 units TP

150 units
If we draw a line (a ray) from the origin to a point on the production function

Rise Q

AP = Q/L AP = 150/10 = 15

Run L

10

AP = Q/L What happens to the AP as L AP = SLOPE OF RAY FROM ORIGIN What happens
increases?

to the slope as L increases?

Q L AP 82 80 70 TP 5 5 1.00 20 10 2.00 30 12 2.50 70 16 4.38 80 20 4.00 82 23 3.57 L

29

30

20
5

1012 16 20 23

AP: INCREASES, REACHES A MAXIMUM AND DECREASES.

AP AP Increases up to 16 workers
70/16 =4.38

AP Decreases after L=16

Q L AP 5 5 1.00 20 10 2.00 30 12 2.50 70 16 4.38 80 20 4.00 82 23 3.57 L L

30

16

THE RELATIONSHIP BETWEEN AP AND MP

IfIfthe your MP next of the grade next isworker say 70is > say your 70 test > If MP (70) > AP (60), then the Average per average worker so average far say so 60,far then say your 60, test then Product increases. the Average per worker increases. average (AP) increases. If MP (50) < AP (60), then the AP will decrease. If MP of the next say 50 < Ifthe your next grade is worker say 50 is < your test If MP = AP, then the AP issay not increasing per worker average so far 60, then average so far say 60, then your test or decreasing: it is at the maximum the per worker average (AP) decreases. Average decreases. point. your next grade isworker 60 = your test IfIfthe MP of the next is say 60 = per average so far 60, then your Average worker average so far say 60, test then the per 31 stays the same . worker average (AP) stays the same.

THE AP AND MP
TP Slope of ray is max

Changes concavity L MP is max AP is max AP

MP,AP

MP

32

MP AND AP
Suppose that 8 workers produce a total of 35 units
So when the 9th worker is hired 9 workers produce a total of 45 units

MP AP

10 Marginal product of 9th worker = 10

5
4.4
MP
AP

9 9 AP of 9 workers = 45/9=5 8 AP of 8 workers = 35/8 = 4.4

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MP AND AP
Suppose that 12 workers produce a total of 71 units
So when the 13th worker is hired 13 workers produce a total of 76.9 units

Suppose that MP = AP: Marginal product of 13th worker = 5.9 MP AP

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5.9

MP=5.9 5.9 5.9

AP remains same

AP

MP

12 13 34 AP of 13 workers = 76.9/13 = 5.9 AP of 12 workers = 71/12 = 5.9

RELATIONSHIP BETWEEN MP AND AP

70
MP AP

70
MP above AP

MP = AP, AP doesnt change and AP is max

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60

60
MP below AP AP

MP
35

CONSIDER A SMALL SANDWICH SHOP

# workers # sandwiches
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L 0 1 2 2.5 3 4 5 6 7 8 9

Q 0 10 25 31.3 35 40 42 42 35 25 10

MP
10 15 12.5 10 5 2 0 -7 -10 -15

AP
10.0 12.5 12.5 11.7 10.0 8.4 7.0 5.0 3.1 1.1

MP= previous AP

AP doesnt change

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L 0

MP

AP

L 0 1 2 3 4 5 6 7 8

MP

Q 0 60 115 165 210 250 285 315 340

AP

1 2 3 4 5 6 7 8 9 10 11 12

5 10 15 20 25 30 35 40 45 In this table: youre given 50 the Marginal Product and you must 55 use it to calculate the Total Product. 60

9
10 11

360
375 385

12

390

Questions to practice for the test

L 0 10 20 30 40 50 Q 5 25 70 110 135 MP AP L 0 10 20 30 40 50 MP 5 20 45 40 25
Here you have the Marginal Product MP and you must calculate the Total Product and AP

AP

Here you have the Total Product Q and you must calculate the MP and AP

60 70
80

153 118
38
Table 1

60 18 70 -35
80 -80

Table 2

Questions to practice for the test

L 0 10 20 30 40 50 60 70 80 Q MP AP L MP 0 10 5 20 20 30 45 40 40 50 25 60 18 70 -35 80 -80 Q AP

5 25 70 110 135 153 118 38

Table 1

Table 2

Questions to practice for the test

L 0 1 2 3 4 5 6 7 8 Q MP AP L 0 1 2 3 4 5 6 7 8 MP Q AP

5 25 70 110 135 153 118 38

Table 1

5 20 45 40 25 18 -35 -80
Table 2

L
0 10 20 30 40

Q
0 5 25 70 110

DQ
5 20 45 40

DL
10 10 10 10

MP
0.5 2 4.5 4

50
60 70 80

135
153 118 38

25
18 -35 -80

10
10 10 10

2.5
1.8 -3.5 -8

DQ

DL

MP

MP *10

0 10 20 30 40
50 60 70 80

0 5 25 70 110
135 153 118 38

0 5 20 45 40
25 18 -35 -80

10 10 10 10
10 10 10 10

0.5 2 4.5 4
2.5 1.8 -3.5 -8

5 20 45 40
25 18 -35 -80

5 25 70 110
135 153 118 38

Questions to practice for the test

For each table in the next slides answer the following questions: 1. What is the shape of the Total Product Curve? Should be able to draw the total product curve. 2. What is the shape of the Marginal Product Curve? Should be able to draw the Marginal Product Curve. 3. What is the shape of the Average Product Curve? Should be able to draw the Average Product Curve. 4. With which worker(s) do we realize increasing/decreasing/negative marginal productivity? How do you know? 5. Would you employ the 6th worker? Why yes/why not? 6. How are the marginal product and the average product related?

FILL IN THE TP AND AP SHOULD BE ABLE TO DRAW THESE GRAPHS.

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L 0 1

MP 5

TP(Q)

AP

2
3 4 5 6

5
5 5 5 5

7
8 9 10 11

5
5 5 5 5
44

12

FILL IN THE TP AND AP SHOULD BE ABLE TO DRAW THESE GRAPHS.

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L 0 1

MP 5

TP (Q)

AP

2
3 4 5 6

10
15 20 25 30

7
8 9 10 11

35
40 45 50 55
45

12

60

FILL IN THE TP AND AP SHOULD BE ABLE TO DRAW THESE GRAPHS.

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L 0 1

MP 60

TP (Q)

AP

2
3 4 5 6

55
50 45 40 35

7
8 9 10 11

30
25 20 15 10
46

12

FILL IN THE TP AND AP SHOULD BE ABLE TO DRAW THESE GRAPHS.

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L 0 1

MP 5

TP(Q)

AP

2
3 4 5 6

10
15 20 17 15

7
8 9 10 11

13
12 10 8 6
47

12

MP=AP MP AP AP MP MP

MP

AP

MP

AP

AP

AP
G MP

MP

MP

II

MP

III

MP

MP

IV