Chapter 20 Presentation 2

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Chapter 20 Presentation 2. Long-run, Short-run and Diminishing Returns. Plant Capacity. The size of the factory building, the amount of machinery and equipment, and other capital resources (human-made resources such as buildings). Short-Run: Fixed Plant. - PowerPoint PPT Presentation

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LONG-RUN, SHORT-RUN AND DIMINISHING RETURNSChapter 20 Presentation 2Plant CapacityThe size of the factory building, the amount of machinery and equipment, and other capital resources (human-made resources such as buildings)Short-Run: Fixed PlantPlant 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 plantSR and LR ExamplesBoeing hires 100 extra workers = short-run adjustmentBoeing adds a new production facility and/or installs more equipment = long-run adjustmentTotal Product (TP)The total quantity or total output of a particular good or service producedMarginal Product (MP)The extra output or added product associated with adding a unit of variable resources to the production processMP = change in total product/change in labor inputLaw of Diminishing ReturnsAs 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 declineEx- if more workers are hired to work w/ a constant amount of equipment, output will eventually rise by smaller and smaller amounts Average Product (AP) AKA Labor productivityAP = total product/units of labor Diminishing Returns ExampleFarmer has a fixed resource of 80 acres planted in cornNo cultivation (weeding) leads to 40 bushels of cornCultivating the weeds once leads to 50 bushelsCultivating the weeds twice leads to 57 bushelsCultivating the weeds three time leads to 61Diminishing Returns Assumptions1. All units of labor are of equal quality2. Each successive unit is presumed to have the same ability, motor coordination, education, training and work experience3. MP eventually ultimately diminishes not because successive workers are less skilled but because there is a fixed amount of resourcesIncreasingMarginalReturnsLaw of Diminishing Returns01234567801025456070757570101520151050-5-10.0012.5015.0015.0014.0012.5010.71 8.75DiminishingMarginalReturnsNegativeMarginalReturnsLaw of Diminishing ReturnsTPMPAPIncreasingMarginalReturnsDiminishingMarginalReturnsNegativeMarginalReturnsFixed Costs (Overhead)Costs that in total do not vary with changes in outputMust be paid even if output is zeroEx- rent, interest on debt, insurance premiums***incurred at all levels of outputVariable CostCosts that change with the level of outputEx- materials, fuel, powerTotal Cost = TFC + TVCTFCTCTVCTotalCostVariableCostFixedCost