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Lesson 5

The document discusses the theory of the firm, focusing on the relationship between labor and outputs through the total product curve and production function. It highlights key concepts such as the law of diminishing marginal returns, fixed and variable inputs, and the distinction between short-run and long-run production. Additionally, it introduces average product and marginal product as measures of output efficiency related to labor input.

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Erica Chricel T. Esperas
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33 views1 page

Lesson 5

The document discusses the theory of the firm, focusing on the relationship between labor and outputs through the total product curve and production function. It highlights key concepts such as the law of diminishing marginal returns, fixed and variable inputs, and the distinction between short-run and long-run production. Additionally, it introduces average product and marginal product as measures of output efficiency related to labor input.

Uploaded by

Erica Chricel T. Esperas
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

LESSON 5: THEORY OF THE FIRM Total Product curve

- Shows the relationship between labor and


- Purpose of the firm is to turn inputs to outputs.
outputs through production.
- It describes how a firm makes cost- Law of Diminishing Marginal returns
minimizing production decisions and how - States that with fixed input (such as capital),
the firm’s resulting cost varies with its labor and output increases at a certain time.
output. But as the time end, output will decrease
- This relationship between inputs and even if labor continues to increases.
outputs are summarized in a “production
function”. Isoquants – shows combinations of outputs
- The goal (quite selfishly) is to earn an that yield at the same total output.
economic profit.
- Part of MICROECONOMICS – deals with Always remember:
individual (consumer behaviour, and theory
- Malayo sa point of origin –mataas ang
of Firm)
output
- We’re looking at the production such as;
- Malapit sa point of origin – mababa ang
 Labor (L)
output
 Physical capital (K)
 Machines
Marginal Rate of Technical Substitution
 Building
(MRTS)
 Raw materials
- Answers the question “how much capital is
 5 Ms
decreased if labor increases?”
CONCEPTS: - Slope of the isoquant
- How y-axis changes as x-axis changes
1. FIXED INPUTS – those inputs na di
- Ratio of the MP of inputs divided by MP of
nadadagdagan/nababawasan (e.g. Capital)
the labor (L) and MP of capital (K)
2. VARIABLE INPUTS – inputs that can be
alter the number/quantity.

Difference of these 2 inputs can be;

 Short Run
- At least 1 factor is fixed inputs
- e.g. resort with fixed land, gyms with fixed
seats
 Long Run
- All factors are variable inputs

Average product (AP)


- (formula: Total output/ amount of labor)
- Increase labor that is skilled, increased in
AP
- Increase in labor that is not skilled,
decreased in AP

Marginal product (MP)


- Yung dinagdag

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