Module Micro 18 Econ 54 The Production Function

Module Micro: 18 Econ: 54 The Production Function KRUGMAN'S MICROECONOMICS for AP* Margaret Ray and David Anderson

What you will learn in this Module: • The importance of the firm’s production function, the relationship between the quantity of inputs and the quantity of output. • Why production is often subject to diminishing returns to inputs.

Production Functions A production function shows the relationship between a firm’s inputs and output

Inputs and Output • Variable Inputs: can be increased to increase production. • Fixed Inputs: cannot be increased in the near term to increase production. • The short run versus the long run Short run: at least one input is fixed. The time period that is too brief for a firm to alter its plant size (capital is fixed). Long run: all inputs may vary. A period of time long enough for a firm to vary all inputs, including capital (plant size).

Total Product • Total Product (TP or Q) is the total output produced by the firm. A graph of the firm’s TP when it uses different levels of a variable input (with a given level of fixed inputs)is the firm’s production function.

Marginal Product • Marginal Product (MP) of an input is the additional output produced as a result of hiring one more unit of the input. MPL = (Δ Total Output)/(Δ Labor) MPC = (Δ Total Output)/(Δ Capital)

Diminishing Returns The shape of the TP curve illustrates the principle of Diminishing Returns to an Input: as more and more of a variable input is added to a fixed input, the additional output produced will decline.

Diminishing Returns

Diminishing Returns