Producer Decision Making

1. Producer Decision Making Chapter 4

2. Producer Decision Making Production - a process by which resources are transformed into products or services that are usable by consumers.

3. Decisions a Producer Must Make Producer Decision Making What to Produce? How Much to Produce? How to Produce? How Big to Be?

4. Producer Decision Making Resource (input) - A factor that can be used to produce a product that can satisfy a human want or desire.

5. Physical Relationships Producer Decision Making Land - everything you see in viewing the earth’s surface. Labor - physical act of performing a task. Management - the sole responsibility of decision making. Capital - every manufactured thing that can be used to aid or enhance production.

6. Producer Decision Making Different quantities and combinations of these four things will produce different amounts of the product.

7. Production Function Producer Decision Making Y = Output X = inputs (land, labor, capital, management) Function Y = f ( x1, x2, x3, ..., xn ) This function is used to determine the level of output given the units of inputs.

8. Mapping a Production Function Producer Decision Making II I IV III

9. Producer Decision Making Constant Returns - if all inputs were increased in a constant ratio, the output will increase by the same percentage as the inputs.

10. Total Physical Product Curve Producer Decision Making Y TPP TPP = Total Physical Product X

11. Producer Decision Making X = 1 acre of land , $1000 of capital, 1 week of management time. 2 X = 2 acres of land , $2000 of capital, 2 weeks of management time. X produces 5 units of output 2 X produces 10 units of output

12. Producer Decision Making Changing the Level of One Input Law of diminishing returns - as successive amounts of a variable input are combined with a fixed input in a production process, the total product will rise, reach a maximum, then eventually decline.

13. Changing the Level of One Input Producer Decision Making Y TPP X1 X2, X3,...,Xn

14. Producer Decision Making Changing the Level of One Input Marginal Physical Product - the amount added to total physical product when another unit of the variable input is used.

15. Producer Decision Making Marginal Physical Product Y TPP Change in Y Change in one unit of X X1 X2, X3,...,Xn

16. Producer Decision Making Marginal Physical Product Or it could be measured at a point of Tangency. Y . TPP X1 X2, X3,...,Xn

17. Producer Decision Making Marginal Physical Product What is MPP Here? Y TPP X1 X2, X3,...,Xn

18. Producer Decision Making Marginal Physical Product Y What is MPP Here? TPP X1 X2, X3,...,Xn

19. Producer Decision Making Marginal Physical Product Change in output TPP Y MPP = = = Change in input X1 X1

20. Producer Decision Making Average Physical Product Y TPP APP Change in Y Change in X X1 X2, X3,...,Xn

21. Producer Decision Making Average Physical Product Y APP TPP X1 X2, X3,...,Xn

22. Producer Decision Making Average Physical Product Y APP TPP X1 X2, X3,...,Xn

23. Producer Decision Making Average Physical Product Output Y APP = = Input X1

24. Producer Decision Making Marginal and Average Product Curves Stage I Stage II Stage III Y MPP APP X1 X2, X3,...,Xn

25. Producer Decision Making Stage I Irrational As long as MPP > APP it will always be profitable to use more of that particular input. So because in Stage I MPP > APP everywhere, we will not produce in this region.

26. Producer Decision Making Marginal and Average Product Curves Stage I Stage II Stage III Y APP MPP X1 X2, X3,...,Xn

27. Producer Decision Making Stage II Rational In Stage II profit maximization will occur. APP > MPP everywhere, and production is still increasing with increases in inputs.

28. Producer Decision Making Marginal and Average Product Curves Stage I Stage II Stage III Y APP MPP X1 X2, X3,...,Xn

29. Producer Decision Making Stage III Irrational Stage III is irrational because as we increase the use of the input X1 output actually falls as a result. This cannot possibly be a profitable region of production.

30. Stage I Stage II Stage III Y TPP Total Physical Product Curve X1 X2, X3,...,Xn Stage I Stage II Stage III Y APP MPP X1 X2, X3,...,Xn Marginal and Average Product Curves

31. Producer Decision Making To determine the optimum level of an input, we need information about the value of the product and the cost of the input. Value of Product TVP = Price of Product * Amount of Product AVP = TVP / Quantity of Input (X1) MVP = Change in TVP / Change in Quantity of Input (X1)

32. Producer Decision Making Marginal and Average Value Curves $Y AVP MVP X1 X2, X3,...,Xn

33. Producer Decision Making Cost of the input Marginal Factor Cost - is the amount added to total cost when an additional unit of the variable input is used. MFCX 1 = PriceX 1

34. Producer Decision Making Marginal and Average Value Curves $Y Optimal Input Usage . AVP MFC= PX 1 MVP X1 X2, X3,...,Xn

35. Producer Decision Making Total Factor Cost TFC = Price X1 * Units of X1 used

36. Producer Decision Making Total Factor Cost $Y Optimal Input Usage . AVP MFC= PX 1 MVP TFC X1 X2, X3,...,Xn

37. Adjusting to Price Changes Producer Decision Making PRODUCT PRICE CAN CHANGE AND WILL INPUT PRICES CAN ALSO CHANGE

38. Producer Decision Making Changing the level of Product Price Increasing Output Price $Y Optimal Input Usage AVP MFC= PX 1 MVP TFC X1 X2, X3,...,Xn

39. Producer Decision Making Changing the level of Product Price Increasing Output Price $Y Optimal Input Usage AVP . MFC= PX 1 TFC MVP X1 X2, X3,...,Xn

40. Producer Decision Making Changing the level of an input price An increase in MFC $Y Optimal Input Usage . AVP MFC= PX 1 MVP TFC X1 X2, X3,...,Xn

41. Producer Decision Making Changing the level of an input price An increase in MFC $Y Optimal Input Usage . AVP MFC= PX 1 MVP TFC X1 X2, X3,...,Xn

42. Producer Decision Making Deriving the demand for an input

43. Producer Decision Making Product Price $ 15 10 2 Demand 80 30 40 Quantity of Input

44. Producer Decision Making Demand for input from MVP $ $Y AVP MVP or Demand for X1 0 120 X1 X2, X3,...,Xn

45. Producer Decision Making Demand for input from MVP $ $Y MFC = Px1 AVP MVP or Demand for X1 0 120 X1 X2, X3,...,Xn 60

46. Producer Decision Making Demand for input from MVP $ $Y AVP MFC = Px1 MVP or Demand for X1 0 120 X1 X2, X3,...,Xn 60

47. Producer Decision Making Demand for input from MVP $ $Y AVP MVP or Demand for X1 MFC = Px1 0 120 X1 X2, X3,...,Xn 60