Chapter09StudyGuide(136.0K).docVIP

Chapter 9 PRODUCTION Boiling Down Chapter 9 If utility has been created for anyone, then production has occurred whether or not the inputs are tangible. The process of generating utility can be spelled out by observing the amount of output that is generated by various combinations of inputs. When all relevant combinations of inputs are related to output we have a production function which is usually described in general terms with the equation Q = F(K,L), where K and L are capital and labor inputs, respectively, and Q is the amount of output generated. The Q itself is not the utility created, but the value added to the raw materials that went into the creation process. Utility is then realized as the output is consumed. Production is divided into two time periods. The short run assumes that capital does not vary from day to day. Labor, can be applied to the fixed capital in varying amounts, creating an entire menu of possible output levels. The idea that one McDonalds hamburger restaurant could employ anywhere from 1 to 100 workers illustrates the short-run decision that a McDonalds manager has to face each week. How many workers to hire will depend on how output responds to differing work force sizes. Figure 9-1 below shows a standard short-run production function that might characterize a McDonalds restaurant for a given day. TP TP MP AP Labor Figure 9-1 Output grows rapidly when the first workers are given more help. As workers are added, the increase in output slows and eventually drops as the workers get in each others way. The marginal product of labor (MPL) is equal to the slope of the production function (MPL = change in TP/change in the labor force), and the average product of labor (APL) is measured by the slope of a ray from the origin of the production function to the point of total o