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Chapter 11

Output & Costs Short-run Technology Constraint

Firms can increase the output in the short-run by increasing the number of labor employed.
This relationship can be best described by using three concepts:
1. Total Product
2. Marginal Product
3. Average Product

Total Product
The Total Product is the maximum output that a given quantity of labor can produce. The TP
changes in accordance to the changes in the quantity of
employees in the firm.

Intially the curve is steep however as the number of


employees increase, the TP Curve becomes less steep. The
flattening of the total product curve is also due to
diminishing returns to inputs in production

The TP Curve seperates the attainable output levels from


the unattainable levels. Products that fall below the TP
curve are attainable however, they are inefficient as they
use more labor than necessary to provide a given output. Any point above the curve is
unattainable.

Points on the TP Curve are technologically effiecient.

Marginal Product
The bars on the MP Curve show the marginal product. The
height of the bars measure the marginal product in relation
to the quantity of labor at the plant. The MP is also
measured by the slope of the TP Curve. The slope of the
curve is the change in the value of the variable measured on
the y-axis divided by the change in the variable on the x-axis
as we move along the curve.

Sweaters per day per worker


In this scenario, the slope =
Labor (Workers per Day)
Diminishing Marginal Returns occurs when the marginal product of an additional worker is
less than the marginal product of the previous worker.

This is due to the fact that more labor is working on the same plant therefore, there
becomes less work for the additional labor.

Law of Diminishing Returns:


As a firm uses more of a variable factor of production with a given quantity of the fixed
factor of production, the marginal product of the variable factor eventually diminishes.

Average Product Curve


The average product curve demonstrates the relationship
between average product and marginal product. The
average product is largest when average product and
marginal product are equal. This occurs when the marginal
product curve cuts the average product curve at the point
of maximum average product.

For the number of workers at which marginal product


exceeds average product, average product is increasing.

For the number of workers at which marginal product is less than average product, average
product is decreasing.

The relationship between the average product and marginal product is a general feature of
the relationship between the average and marginal values of any variable

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