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Lecture Essentials of Economics: Chapter 5 - Bradley R. Schiller, Cynthia Hill

Chapter 5 "Supply decisions", after reading this chapter, you should be able to: Explain what the production function reveals; explain why the law of diminishing returns applies; describe the nature of fixed, variable, and marginal costs; illustrate the difference between production and investment decisions; discuss how accounting costs and economic costs differ. | Chapter 5 Supply Decisions Supply Supply is the ability and willingness to sell (produce) specific quantities of a good at alternative prices in a given time period, ceteris paribus. 5- This is a basic definition of supply. Factors of Production Factors of production are the resource inputs used to produce goods and services. Such factors include land, labor, capital, and entrepreneurship. 5- The Production Function A technological relationship expressing the maximum quantity of a good attainable from different combinations of factor inputs. Its purpose is to tell just how much output can be produced as the amount of inputs, such as labor, are varied. 5- .Often expressed graphically, the production function shows the level of output that is achievable with different amounts of resources. Figure 5.1 5- Marginal Physical Product (MPP) The MPP is the change in total output associated with one additional unit of input. 5- Marginal physical product (MPP) is the additional or extra output from adding another unit of a resource, such as a worker. Law of Diminishing Returns The marginal physical product of a variable input eventually declines or diminishes as more of it is employed with a given quantity of other (fixed) inputs. The additional units of resources (inputs) are less valuable to the firm. 5- Diminishing returns means that, after a while, additional units resources become less-and-less productive. Short Run versus Long Run Traditional accounting periods (short run up to a year and long run beyond that time) aren’t always useful in economics. Short run is the period in which quantity of some inputs, usually land and capital, can’t be changed. Long run is the period of time long enough for all inputs to be varied. 5- The short run is an immediate time period. The long run is a period of time long enough for all inputs to be varied (no fixed costs). It is well into the future. Total Profit and Total Cost | Chapter 5 Supply Decisions Supply Supply is the ability and willingness to sell (produce) specific quantities of a good at alternative prices in a given time period, ceteris paribus. 5- This is a basic definition of supply. Factors of Production Factors of production are the resource inputs used to produce goods and services. Such factors include land, labor, capital, and entrepreneurship. 5- The Production Function A technological relationship expressing the maximum quantity of a good attainable from different combinations of factor inputs. Its purpose is to tell just how much output can be produced as the amount of inputs, such as labor, are varied. 5- .Often expressed graphically, the production function shows the level of output that is achievable with different amounts of resources. Figure 5.1 5- Marginal Physical Product (MPP) The MPP is the change in total output associated with one additional unit of input. 5- Marginal physical product