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[EKP 200]

PENGANTAR TEORI EKONOMI


Undergraduate Course

A. Farah
(alfafarah@gmail.com)

Lecture 4
Production & Cost in the Short Run

Department of Economics and Development Studies


Diponegoro University

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Equilibrium Price & Output
Supply and Demand

Demand
Consumer behavior
Maximizing utility of consuming goods

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We’ve already talked about what consumers’
want, but then who’s gonna produce what
they want?
And how to produce what they want?

Supply Curve
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Production Process

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Profit-maximizing firms

All firms must make several basic decisions to


achieve what we assume to be their primary
objective — maximum profits

•2.
•1. Which •3.
How much production How much of
output to technology each input to
supply to use demand

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Production Function

Inputs :
labor, land, raw materials, capital, entrepreneurship

q = f(K, L)
The production function specifies the maximum output that can
be produced with a given quantity of inputs, given available
technical knowledge

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Short Run vs Long Run

Short Run is the period of time in which only


some inputs, the variable inputs, can be
adjusted. The fixed inputs such as plant and
equipment, cannot be modified
Long Run is the period in which all factors
employed by the firm can be changed.

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Production in the Short Run

Production with One Variable Input


Units of Units of Total Output
Labor (L) Capital (K)
0 10 0
1 10 3
2 10 10
3 10 24
4 10 36
5 10 40
6 10 42
7 10 42
8 10 40

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40
Tonnes of wheat produced per year

30

20

10

0
0 1 2 3 4 5 6 7 8
Number of farm workers
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Production in the Short Run
Production with One Variable Input
Units of Units of Total Average Marginal
Labor (L) Capital (K) Product Product Product
0 10 0
1 10 3 3 3
2 10 10 5 7
3 10 24 8 14
4 10 36 9 12
5 10 40 8 4
6 10 42 7 2
7 10 42 6 0
8 10 40 5 -2

What can you deduce about Total Product (TPP), Average


Product (APP) and Marginal Product (MPP)?
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Production in the Short Run

We will get less and less extra output when we


add additional doses of an input (L) while
holding other input fixed (K).

The Law of Diminishing Return

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d
40
TPP
Tonnes of wheat produced per year

30 Maximum output

Diminishing returns
20 set in here
b

10

Number of farm workers


0
0 1 2 3 4 5 6 7 8
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Tonnes of wheat per year
40
TPP
30

20

10
DTPP = 7
0 Number of
0 1 2 3 4 5 6 7 8 farm workers (L)
DL = 1
Tonnes of wheat per year

14
12
10
8 MPP = DTPP / DL = 7
6
4
2
0 Number of
-2 0 1 2 3 4 5 6 7 8 farm workers (L)
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Tonnes of wheat per year
40
TPP
30

20

10

0 Number of
0 1 2 3 4 5 6 7 8 farm workers (L)
Tonnes of wheat per year

14
12
10
8
6
4
2
0 Number of
-2 0 1 2 3 4 5 6 7 8 farm workers (L)
MPP
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40

Tonnes of wheat per year


TPP
30

20 b
Diminishing returns
10 set in here

0 Number of
0 1 2 3 4 5 6 7 8 farm workers (L)
b
14
Tonnes of wheat per year

12
10
8
6
4 APP
2
0 Number of
-2 0 1 2 3 4 5 6 7 8 farm workers (L)
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MPP Created : Sept 2014
d

Tonnes of wheat per year


40
TPP
30

20 Maximum
b
output
10

0 Number of
0 1 2 3 4 5 6 7 8 farm workers (L)
b
Tonnes of wheat per year

14
12
10
8
6
4 APP
2
0 d
0 1 2 3 4 5 6 7 8
Number of
-2 farm workers (L)
A. Farah
MPP Created : Sept 2014
d
40 Slope = TPP / L

Tonnes of wheat per year


c
= APP TPP
30

20 b

10

0 Number of
0 1 2 3 4 5 6 7 8 farm workers (L)
b
14
Tonnes of wheat per year

12
10 c
8
6
4 APP
2
0 d Number of
-2 0 1 2 3 4 5 6 7 8 farm workers (L)
MPP
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3 Production Concept

1. Total Product
2. Average Product
3. Marginal Product

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Cost in the Short Run

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Cost in the Short Run

Total Total
Output Fixed Variable Total Cost
Cost Cost
0 12 0 12
1 12 10 22
2 12 16 28
3 12 21 33
4 12 28 40
5 12 40 52
6 12 60 72
7 12 91 103

Draw!
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Output TFC TVC TC TC
100 (Q) (£) (£) (£)
TVC
0 12 0 12
80 1 12 10 22
2 12 16 28
3 12 21 33
60 4 12 28 40
5 12 40 52
6 12 60 72 Diminishing
7 12 91 103 marginal
40
returns set in
here

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TFC
0
0 1 2 3 4 5 6 7 8
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TC = TFC +TVC

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TLDR & MC
MC

Diminishing
marginal
returns set in
here
Costs (£)

x
Output (Q)
AC & MC

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Average and marginal costs

MC
AC
AVC
Costs (£)

z
y
x
AFC

Output (Q)
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