# Short Run Production Example

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```					Short Run Production
Example
Here we use an example to
concepts.

1
Example of production in the
short run
 Imagine   the room you are in is a cookie
factory - like at a shopping mall.
 The fixed input is the production
facility and it includes refrigerators,
bowls, mixers, ovens, tables and other
stuff. The variable input will be labor.
We will observe output levels at
various levels of labor used.
2
Numerical example
units units of TP or MP or    AP or
of  capital total marg.      avg.
labor          output prod.   prod.
0      1       0      -        -
1      1       10    10       10
2      1       25    15      12.5
3      1       37    12     12.33
4      1       47    10     11.75
5      1       55     8       11
6      1       60     5       10
7      1       63     3        9
8      1       63     0     7.875
9      1       62    -1      6.89

3
Example continued
This is just an example where we have added labor to
a fixed amount of capital. Total output in this example
will be measured in dozens of cookies per hour.

4
MP or marginal product
 MP  is the additional output from
 As more of the variable input is used
with a fixed input, the marginal
product first increases, reaches a
maximum, then diminishes and even
becomes negative.

5
MP - continued
  MP is a max. at 2 units of labor and
begins to diminish with the 3rd unit of
labor.
 As more labor is added there is less and
less tools - capital - to use, so additional
workers can not add as much output as
previous workers.

6
AP or average product
 At an output level AP = (total
output)/(amount of labor used).
 AP mimics MP - analogy of heights of
people in a room. What happens to the
average height of people in the room
when the next guy in is 7 feet tall?

7
Short Run cost
 We  will continue with our example of
production, but now we will make
inputs and then think about how
production costs change as the level of
output changes.
 There are two types of cost in the short
run; fixed and variable.
8
Total Fixed Cost (TFC)
 Fixed costs do not vary with changes in
output since more or less of the fixed
input can not be used in the short run.
 Remember we have assumed the fixed
input is capital.
 Fixed cost will be incurred in the short
run whether output is 0 or 1,000,000 or
any amount.
9
Total Variable Cost (TVC)
 Variable  costs are those costs that vary
with the level of output.
 Examples of variable costs are labor,
electricity, materials and so on.

10
Definitions
 TotalCost (TC) = TFC + TVC
 AFC = TFC/Q which means AFC times
Q = TFC.
 AVC = TVC/Q or AVC times Q = TVC.
 ATC = TC/Q or ATC times Q = TC.
 Marginal cost (MC) = (change in
TC)/(change in output).

11
Example continued
 Recall  our cookie factory example.
 Let’s say production in our example
will occur for one hour and the fixed
cost is \$40 during that hour.
 Let’s say every laborer gets total
compensation of \$10 per hour.

12
Example continued
 To  conserve space I have made up
 (1) = units of labor, (2) = units of capital,
(3) = TP or total output or Q, (4) = MP
or marginal product, (5) = TFC, (6) =
TVC, (7) = TC (8) = MC, (9) = AFC, (10)
= AVC, (11) = ATC or just AC.

13
Example continued
(1) (2) (3)   (4)   (5)   (6)   (7)   (8)    (9)    (10) (11)
0   1    0     -    40    0     40     -      -      -      -
1   1   10    10    40    10    50     1      4      1      5
2   1   25    15    40    20    60    .67    1.6    .8     2.4
3   1   37    12    40    30    70    .83    1.08   .81    1.89

4   1   47    10    40    40    80     1     .85    .85    1.70

5   1   55    8     40    50    90    1.25   .73    .91    1.64

6   1   60    5     40    60    100    2     .67     1     1.67
7   1   63    3     40    70    110   3.33   .64    1.11   1.75

14
MC an MP relationship
 As more labor is added, output
changes, and so do total cost and total
variable values.
 When MP is rising, MC is falling.
 When MP is a max., MC is a min.
 When MP is diminishing, MC is
increasing.

15
MC and MP relationship
MP -column 4
MP curve

L -column 1
2
MC                MC curve
column
8
Q -column 3
25

16

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