Firms Technologies Production Costs and Supply Decisions How Does a Firm Decide Quantity Supplied and What Does it Cost Upon What Does Market Supply Depend The quantity supplied to the market is the sum of the quantities supplied by individual firms So to understand a market supply curve we must understand how individual firms decide the quantities that they supply Upon What Does Market Supply Depend How does an individual firm decide how much to produce Upon what will this decision depend The price of the firm s product The prices of the firm s inputs The firm s technology What is a Technology A technology is any process by which inputs are combined to produce an output Often various technologies exist for producing the same product E g how many technologies are there for producing a mown lawn And how many technologies are there for producing lectures Production Functions A technology is any process by which inputs are combined to produce an output The relationship between quantities of inputs used and the quantity of output produced is called a firm s PRODUCTION FUNCTION The Bathtub Firm s Production Function The relationship between quantities of inputs used and the quantity of output produced is called a firm s PRODUCTION FUNCTION Our bathtub firm is restricted to using just one machine but can vary the quantity of labor it uses in order to alter the number of bathtubs produced The Bathtub Firm s Production Function Production Functions Whenever a firm can vary the quantity used of an input that input is said to be VARIABLE Whenever a firm cannot vary the quantity used of an input that input is said to be FIXED The Bathtub Firm s Production Function Machine Units Used FIXED 1 1 1 1 1 1 1 1 1 Labor Units Used VARIABLE 0 1 2 3 4 5 6 7 8 Total No Bathtubs Produced 0 4 10 16 20 23 25 26 26 The Firm s Production Function Bathtubs One bath making machine 23 25 26 26 20 16 10 4 0 1 2 3 4 5 6 7 Labor Units 8 L Production Functions Would you pay to hire the 8th labor unit The Firm s Production Function Bathtubs One bath making machine 23 25 26 26 20 16 10 4 0 1 2 3 4 5 6 7 Labor Units 8 L Production Functions Would you pay to hire the 8th labor unit No Production Functions Would you pay to hire the 8th labor unit No Would you hire the 7th labor unit Upon what would this decision depend The Firm s Production Function Bathtubs One bath making machine 23 25 26 26 20 16 10 4 0 1 2 3 4 5 6 7 Labor Units 8 L Production Functions Would you pay to hire the 8th labor unit No Would you hire the 7th labor unit Upon what would this decision depend The extra cost of hiring the 7th labor unit and the extra revenue generated by the 7th labor unit Marginal Products of Labor The MARGINAL PRODUCT of a labor unit is the extra quantity of output obtained from that one extra labor unit The Bathtub Firm s Production Function Machine Units Used FIXED 1 1 1 1 1 1 1 1 1 Labor Units Used VARIABLE 0 1 2 3 4 5 6 7 8 Total No Bathtubs Produced 0 4 10 16 20 23 25 26 26 Marginal Products of Labor The MARGINAL PRODUCT of a labor unit is the extra quantity of output obtained from that one extra labor unit What is the firm s output level when it uses 3 labor units What is the firm s output level when it uses 4 labor units What is the extra output added by the 4th labor unit Marginal Products of Labor The MARGINAL PRODUCT of a labor unit is the extra quantity of output obtained from that one extra labor unit What is the firm s output level when it uses 3 labor units 16 bathtubs What is the firm s output level when it uses 4 labor units What is the extra output added by the 4th labor unit Marginal Products of Labor The MARGINAL PRODUCT of a labor unit is the extra quantity of output obtained from that one extra labor unit What is the firm s output level when it uses 3 labor units 16 bathtubs What is the firm s output level when it uses 4 labor units 20 bathtubs What is the extra output added by the 4th labor unit Marginal Products of Labor The MARGINAL PRODUCT of a labor unit is the extra quantity of output obtained from that one extra labor unit What is the firm s output level when it uses 3 labor units 16 bathtubs What is the firm s output level when it uses 4 labor units 20 bathtubs What is the extra output added by the 4th labor unit 4 bathtubs The Bathtub Firm s Production Function Machine Units Used FIXED 1 1 1 1 1 1 1 1 1 Labor Units Used VARIABLE 0 1 2 3 4 5 6 7 8 Total No Bathtubs Produced 0 4 10 16 20 23 25 26 26 4 Marginal Products of Labor The MARGINAL PRODUCT of a labor unit is the extra quantity of output obtained from that one extra labor unit What is the marginal product of the 4th labor unit Marginal Products of Labor The MARGINAL PRODUCT of a labor unit is the extra quantity of output obtained from that one extra labor unit What is the marginal product of the 4th labor unit 4 bathtubs per labor unit The Bathtub Firm s Production Function Machine Labor Units Total No Marginal Units Used Used Bathtubs Product of FIXED VARIABLE Produced Labor 1 0 0 1 1 4 1 2 10 1 3 16 1 4 20 1 5 23 1 6 25 1 7 26 1 8 26 The Bathtub Firm s Production Function Machine Labor Units Total No Marginal Units Used Used Bathtubs Product of FIXED VARIABLE Produced Labor 1 0 0 1 1 4 1 2 10 1 3 16 1 4 20 4 1 5 23 1 6 25 1 7 26 1 8 26 The Bathtub Firm s Production Function Machine Labor Units Total No Marginal Units Used Used Bathtubs Product of FIXED VARIABLE Produced Labor 1 0 0 1 1 4 4 1 2 10 6 1 3 16 6 1 4 20 4 1 5 23 3 1 6 25 2 1 7 26 1 1 8 26 0 The Firm s Production Function Bathtubs One bath making machine 25 126 0 26 23 2 20 3 16 4 10 6 4 6 4 0 1 2 3 4 5 6 7 Labor Units 8 L Marginal Products of Labor Bathtubs Labor Unit One bath making machine 4 0 1 6 6 2 3 4 3 4 5 2 1 0 6 7 Labor Units 8 L Marginal Products of Labor The Law of Diminishing Marginal Returns states When one or more of a firm s inputs is fixed increasing …