Lecture Notes: Production Economics

Announcements

• Office Hours: Tomorrow from 3:30 to 5:30.

• Chapter 2: Core syllabus skeleton notes are online. Highly recommended.

• Lab Sessions:

  • Thursday and Friday this week.
  • Lab report #1 due at the beginning of your lab.
  • Missed lab: Email if needed.

• Tutoring:

  • Starting today at 3:00 PM in Waters Annex 104.
  • Tomorrow from 5:00 to 6:30 PM (Zoom link available online).

• No Class on Monday: University closed for Labor Day.

Production Economics

Production Function

• Characterizes production by relating output to inputs (land, labor, capital, management).
• Can be represented:
  • Mathematically: Linear or nonlinear functions.
  • Graphically: Production schedule or graph.

Production Concepts

• Purpose: Understand production processes before analyzing profitability and costs.
• Production function often nonlinear (hill-shaped curve).

Key Concepts

Total Physical Product (TPP)

• Represents output in relation to one input, holding others constant.

Average Physical Product (AP)

• Average output per unit of input.
• Measures efficiency.
• Formula: Total Output ÷ Total Input.

Marginal Physical Product (MPP)

• Change in output from an additional unit of input.
• Formula: Change in Output ÷ Change in Input.
• Represents the slope of the production function.

Areas of Production

Increasing Returns

• MPP is rising.
• Production increases at an increasing rate.

Decreasing Returns

• MPP is decreasing but positive.
• Production increases at a decreasing rate.

Negative Returns

• MPP is negative.
• Additional inputs reduce total output.

Economic Implications

Law of Diminishing Marginal Returns

• Adding more of a single input, while holding others constant, will eventually yield lower additional output.
• Seen in various production processes, such as agriculture and animal husbandry.

Graphical Analysis

• MPP Curve: Derived from the production function.
• AP Curve: Driven by MPP.
• Intersection of MPP and AP curves indicates maximum efficiency.
• Profit maximization lies between this intersection and the point of negative returns.

Practical Example

• Acme Wines: Used to illustrate concepts of TPP, AP, and MPP.
• Scenario: Analyzing labor input in a wine filling factory.

Conclusion

• Remember the announcement on lab report deadlines and tutoring sessions.
• Understand key concepts in production economics for application in real-world scenarios.