long-run, short-run and diminishing returns chapter 20 presentation 2
TRANSCRIPT
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LONG-RUN, SHORT-RUN AND DIMINISHING RETURNS
Chapter 20 Presentation 2
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Plant Capacity
The size of the factory building, the amount of machinery and equipment, and other capital resources (human-made resources such as buildings)
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Short-Run: Fixed Plant
Plant capacity is fixed in the short-runThe firm can vary its output by applying
smaller or larger amounts of labor, materialsCan use existing plant more or less
intensivelyLong-Run = variable plant
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SR and LR Examples
Boeing hires 100 extra workers = short-run adjustment
Boeing adds a new production facility and/or installs more equipment = long-run adjustment
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Total Product (TP)
The total quantity or total output of a particular good or service produced
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Marginal Product (MP)
The extra output or added product associated with adding a unit of variable resources to the production process
MP = change in total product/change in labor input
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Law of Diminishing Returns
As more units of a variable resource (ie labor) are added to a fixed resource (ie land, factory), at some point the marginal product that can be attributed to each additional unit of the variable resource will decline
Ex- if more workers are hired to work w/ a constant amount of equipment, output will eventually rise by smaller and smaller amounts
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Average Product (AP)
AKA Labor productivityAP = total product/units of labor
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Diminishing Returns Example
Farmer has a fixed resource of 80 acres planted in corn
No cultivation (weeding) leads to 40 bushels of corn
Cultivating the weeds once leads to 50 bushels
Cultivating the weeds twice leads to 57 bushels
Cultivating the weeds three time leads to 61
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Diminishing Returns Assumptions
1. All units of labor are of equal quality2. Each successive unit is presumed to have
the same ability, motor coordination, education, training and work experience
3. MP eventually ultimately diminishes not because successive workers are less skilled but because there is a fixed amount of resources
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IncreasingMarginalReturns
Law of Diminishing Returns
(1)Units of the
Variable Resource(Labor)
(2)Total Product
(TP)
(3)Marginal Product
(MP),Change in (2)/Change in (1)
(3)AverageProduct
(AP),(2)/(1)
012345678
01025456070757570
1015201510
50
-5
-10.0012.5015.0015.0014.0012.5010.71 8.75
]]]]]]]]
DiminishingMarginalReturns
NegativeMarginalReturns
O 20.1
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Law of Diminishing Returns
0
10
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To
tal P
rod
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, TP
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20
10
Mar
gin
al P
rod
uct
, MP
1 2 3 4 5 6 7 8 9
TP
MP
AP
IncreasingMarginalReturns
DiminishingMarginalReturns
NegativeMarginalReturns
O 20.2
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Fixed Costs (Overhead)
Costs that in total do not vary with changes in output
Must be paid even if output is zeroEx- rent, interest on debt, insurance
premiums***incurred at all levels of output
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Variable Cost
Costs that change with the level of outputEx- materials, fuel, power
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Total Cost = TFC + TVC
Co
sts
1 2 3 4 5 6 7 8 9 100 Q
100
200
300
400
500
600
700
800
900
1000
$1100
TFC
TC
TVC
TotalCost
VariableCost
FixedCost