Essay About Maximum Amount Of Output And Lowest Possible Cost

Bus 301 Managerial Economics Lecture Notes
BUS 301 Managerial Economics Lecture NotesBy Bill Y. ChenLecture NotesChapter 8 Production and Cost in the Short RunBasic concepts of production theoryproduction: the creation of goods and services from inputs or resources;production function: a schedule (table, or mathematical equation) showing the maximum amount of output that can be produced from any specified set of inputs, given the existing technology;Q = f (X1, X2, …, Xn), where X1, X2, …, Xn are inputs; specificallyQ = f (L, K), where L-Labor, K-Capital.Technical efficiency: production of the maximum level of output that can be obtained from a given combination of inputs; i.e. largest Q!Economic efficiency: production of given amount of output at the lowest possible cost; i.e. given Q, the lowest cost of the inputs!Short run and long run: fixed input:  an input for which the level of usage cannot readily be changed; variable input: an input for which the level of usage may be changed quite readily;short run: that period of time in which the level of usage of one or more of the inputs is fixed; such as Q = f(L, [pic 1]) =f(L), where [pic 2]means fixed;long run: that period of time (for planning horizon) in which all inputs are variable.Variable proportions production: at which a given level of output can be produced with more than one combination of inputs;Fixed proportions production: at which one, and only one, ratio of fixed of inputs can be used to produce a good;Production in the short runAssume that Q = f (L, [pic 3])Total product: given [pic 4], the amount of output (Q) with different L level;Average product of labor (AP): the total product (output) divided by the number of workers; AP =Q/L;Marginal product (MP): the additional output attributable to using one additional worker (others fixed), MP =ΔQ/ΔL; Law of diminishing marginal product: the principle that as the number of units of the variable input increases, other inputs held constant, a point will be reached beyond which the marginal product decreases. In other words, MP is a decreasing function of the input after some point!Changes in fixed inputs.Draw graphs from