Production and Costs. Average and Marginal Product Marginal Product of Labor=Increase of Product when Employing an Additional Worker (≠ marginal benefit)

Production and Costs

Average and Marginal Product

Marginal Product of Labor=Increase of Product when Employing an Additional Worker (≠ marginal benefit)

Average Product of Labor or Product per Worker=Total Product/Number of Workers

Total, Marginal and Average Products

2 12 7 6

3 21 9 7

4 28 7 7

5 33 5 6.6

6 36 3 6

7 37 1 5.3

Labor Total Product

Marginal Product Average Product

1 (worker) 5 (dresses) 5 (d. added by additional worker)

5 (d.p.w.)

Total, Marginal and Average Products

Number of Workers

Out

put

Number of Workers

Out

put

per

Wor

ker

L0 L1

TP

MPL

APL

Gai

ns o

f S

peci

aliz

atio

n

Diminishing

Marginal Returns

Q

L

Average and Marginal Product

Suppose that 5 bakers bake 500 cupcakes. The average product of labor is 100 (500/5).

A new baker is employed and total output goes up to 630 cupcakes.

The marginal product of adding an additional worker is 130. The new average product of labor is 630/6=105.

If the marginal product of labor is larger than 100, the average product of labor rises. If the marginal product of adding an additional worker is less than 100, the average product of labor falls.

Then, the marginal product curve cross the average product curve when the average cost of labor is at the maximum.

Costs (5 machines $10 per machine, wage is $15 per worker)

Labor Total Product

1 5

2 12

3 21

4 28

5 33

6 36

7 37

Variable Cost

15

30

45

60

75

90

105

Total Costs

65

80

95

110

125

140

155

Average Costs (per unit cost)AVC=VC/QAC=TC/Q

If labor is the only Variable Input: Variable CostAVC=VC/Q=(PL*L)/Q=PL/(Q/L)=PL/APL

Marginal CostsThe increase in total cost when increasing production by 1

unit (not when increasing labor by 1 unit!).

MC=PL*(1/MPL)One additional worker adds MPL to product. It is needed

1/MPL units of workers to produce one unit of the product.

Cost Curves

Labor Product MPL APL VC TC AVC AC MC1 5 5 5 15 65 3 13 3 (1/5)*15

2 12 7 6 30 80 2.5 6.6 2.14

3 21 9 7 45 95 2.14 4.5 1.67

4 28 7 7 60 110 2.14 3.9 2.14

5 33 5 6.6 75 125 2.27 3.7 3

6 36 3 6 90 140 2.5 3.8 5

7 37 1 5.3 105 155 2.84 4.1 15

Total and Variable Costs

Output

$TC

VC

Relationship Between Marginal and Average Products and Costs

Output

$ pe

r un

it of

out

put

Number of Workers

Out

put

per

Wor

ker

L0 L1

MC

MPL

APL

AC

AVC

Q1(L1)Q0(L0)

MC=PL*(1/MPL)

AVC=PL/APL

Average and Marginal Cost

Suppose the total cost of producing 5 units is $100. The average cost is $20. A new unit is produced and the total cost goes to $130.

The marginal cost of producing an additional unit is $30.

The new average cost is 130/6=25.

If the marginal cost is larger than 20, the average cost rises. If the marginal cost of producing an additional unit is less than 20, the average cost falls.

Then, the marginal cost cross the average cost curve when the average cost of labor is at the minimum.

Fixed Costs

Output

$

Output

Cos

t pe

r un

it of

out

put

AFC

AVC

ATC

FC

Short Run and Long Run

Output

Cos

t pe

r U

nit

ACSR AC long run

Q*