ECON107
Principles of
Microeconomics
Week 11
NOVEMBER 2013
Chapter-11
1
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Dr. Mazharul Islam
11
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OUTPUT AND COSTS
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Lesson Objectives
 Distinguish
between the short run and
the long run
 Explain the relationship between a firm’s
output and labor employed in the shortrun.
 Explain and illustrate a firm’s short-run
product curves
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Decision

The three decisions
that all firms must
make include:
1.
How much
output to
supply
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2.
Which
production
technology
to use
3.
How much
of each
input to
demand
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Some Basic Concepts
Economic
Costs:
A firm’s economic costs are the
opportunity costs of the resources used,
whether those resources are owned by
others or by the firm.
Economic Costs = Explicit costs + Implicit costs

Explicit costs
Refer to the firm’s actual cash payments for
resources owned by others  wages, rent,
interest, insurance, taxes, etc.
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Some Basic Concepts
Implicit
costs:
Refer to the opportunity costs of using its
self-owned,
self-employed
resources.
Implicit costs are the money payments that
self-employed resources could have earn
in their best alternative use.

Total Revenue:
It is the amount received from the sale of
the product; it is equal to the number of
units sold (Q) times the
price
received
per unit (P). So TR = P x Q
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Example
Khaleed operates a small furniture firm.
He hires one assistant at SR21,000 per
year, pays annual rent of SR5000 a year
for his shop, an invested SR20,000 from
his savings on materials that could have
earn him SR1000 per year as interest
rate. He has been offered SR24,000 per
year to work as a manager for
competitor.
He
estimates
his
entrepreneurial talents are worth SR3000
per year. Total annual revenue from
furniture sales is SR100,000.
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Some Basic Concepts
Economic
Profits:
Refer to the difference between total
revenue and economic costs.
Economic
Profit

Total
Revenue
Economic Cost
Production Function:
The relationship between the amount of
resources employed and a firms total
product is called firm’s production function.
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Time Frame
All
decisions can be placed in two
time frames:
The short run
 The long run

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Time Frame
Short
Run
The short run is a time frame in which the
quantity of at least one resource used in
production is fixed.
 For most firms, the capital, called the
firm’s plant, is fixed in the short run.
 Other resources used by the firm (such as
labor, raw materials, and energy) can be
changed in the short run.
 Short-run decisions are easily reversed.
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Dr. Mazharul Islam
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Time Frame
Long
Run
The long run is a time frame in which the
quantity of all resource used in production
is variable.
 Long-run
decisions are not easily
reversed.
 Variable resources can be varied
quickly to change the output rate.
 Fixed resources are those resources
which cannot be easily changed.
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Short-Run Production Relationships
To increase output in the short run, a
firm must increase the amount of
labor employed because technology
is constrained. Three concepts
describe the relationship between
output and the quantity of labor
employed:
1. Total product
2. Marginal product
3. Average product
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Short-Run Production Relationships
 Total Product (TP): It means total quantity
or total output of a particular good
produced in a given period.
 Marginal Product (MP): it is extra output
associated with adding an unit of
variable resource (in this case, labor) to
production process while all other inputs
remaining the same.
Change in Total Product
Marginal Product =
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Change in Labor Input
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Short-Run Production Relationships
 Average
Product (AP): It is called labor
productivity. The output of per unit of
resource (in this case per unit labor
output).
Total Product
Average Product =
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Units of Labor
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Short-Run Production Relationships
Table 11.1 shows a firm’s
product schedules. As the
quantity of labor employed
increases:
 Total product increases.
 Marginal product
increases initially but
eventually decreases.
 Average product
decreases.
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Short-Run Production Relationships
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Short-Run Production Relationships
 Increasing
marginal returns: The marginal
products of a variable resource (labor)
increases as each additional unit of that
resource is employed.
 Increasing marginal returns arise. Why?
Due specialization and division of labor.
 Law of diminishing marginal return states
that the more of a variable resource is
added with a given amount of a fixed
resource, other things constant, marginal
product eventually declines and could
become negative.
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Short-Run Production Relationships
 Diminishing
marginal returns arises. Why?
Because each additional worker has less
access to capital and less space in which
to work.
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Now it’s over for today. Do you
have any question?
5w/9/2013
Dr. Mazharul Islam