Average product of labor graph

A firm’s product price multiplied by the total number of items sold is called

total revenue

A firm’s total revenue is equal to price multiplied by quantity.

Economic profit

is never larger than accounting profit

Economic profit is total revenue less total opportunity costs. Total opportunity costs include both explicit and implicit costs.

The extra output that the last worker hired adds to total production is called the

marginal product of labor

The marginal product of labor is the additional output produced by the last worker hired.

The short run is a situation such that

at least one input to production is fixed in quantity.

In the short run at least one input is fixed. In the long run all inputs may vary.

Labor

Output

1

0

2

8

3

14

4

18

5

20

Consider the table above. What is the average product when 4 workers are hired?

4.5

The average product of labor is calculated as Q/L.

Consider the graph above. The slope of the production function reflects

increasing marginal cost

The slope of the production function is marginal product. When marginal product falls, marginal cost rises.

Consider the figure above. Which graph represents a production function?

A

Graph (a) shows a production function. If output is on the vertical axis and labor is on the horizontal axis, then output expands as additional labor is hired – but at a diminishing rate. This is according to the law of diminishing marginal productivity.

At low levels of output, average total cost is high due to high levels of

average fixed cost

Recall that ATC = AFC + AVC. ATC is highest at low levels of output since AFC is highest at low levels of output. AFC continually decreases as output expands.

Labor

Output

Variable Cost

Fixed Cost

Total Cost

0

0

12

1

10

5

2

18

22

3

24

15

4

28

20

32

Consider the table above. What is the average fixed cost at 24 units of output?

.50$

AFC = FC/Q = 12/24

Economies of scale can result from

increased specialization

Firms can capitalize on economies of scale by allowing workers to specialize in specific tasks. This tends to increase productivity and reduce costs.

Bob used to earn $40,000 per year in his job as a nurse, but he quit in order to open his own pizza shop. Bob used $10,000 from his own savings account and borrowed $200,000 more from his bank. The interest rate is 4%. In Bob’s first year of business he earned $80,000 in revenue and the cost of ingredients (flour, tomato sauce, cheese, etc.) was $67,000. For his first year of business, Bob’s accounting profit was _______, and his economic profit was ______.

$5,000; - $35,400

Remember the difference between accounting profit and economic profit is in the way costs are calculated. Accounting profit takes into account explicit costs only, whereas economic profit considers both explicit and implicit costs.

A firm’s product price multiplied by the total number of items sold is called

total revenue

A firm’s total revenue is equal to price multiplied by quantity.

Labor

Output

0

0

1

8

2

14

3

18

4

20

Consider the table above. What is the Marginal product of the 3rd worker?

4

The marginal product of labor is calculated as the change in Q divided by the change in L.

Labor

Output

Variable Cost

Fixed Cost

Total Cost

0

0

12

1

10

5

2

18

22

3

24

15

4

28

20

32

Consider the table above. What is the marginal product of the second worker?

8

Marginal product is calculated as the change in output divided by the change in labor.

The production function shows the relationship between

the inputs to production and the quantity of output produced.

The production function shows the relationship between the quantity of inputs used in production (for example labor) and the quantity of output produced.

If a firm wants to take advantage of economies of scale, they might

convert the production process into an “assembly line”.

Specialization and an assembly line production process will enable a firm to capitalize on economies of scale.

Which of the graphs above show marginal productivity first rising and then declining?

(b) & (d)

In the short run, as more of the variable input is hired, marginal product may at first increase, but it will eventually decline.

Which of the costs below do not vary when a firm changes its level of production?

fixed cost

Fixed costs are costs that do not vary as output varies.

Consider the figure above. Which curve is AFC?

D