AGEC 2003 : Ag Econ Test 2
Ag Econ Test 2 3/20/2015 12:28:00 AM
Terms
• Production: a process by which resources are transformed into
products and services that are usable by consumers
• Resource (input): a d=factor that can be used to produce a product
that can satisfy a human want or desire
• Production function : the particular set or combination of resources
(inputs) used to produce a given level of product (output)
• Marginal Physical product (MPP):an amount to total physical
product when another unit of variable input is added
o This is equivalent to the change in output divided by the
change in variable input.
• Average physical product (APP) :how productive the variable input
is on the average, or per unit of X1
• Total Value product (TVP): shows the dollar worth of output
produced by the different amounts of the input X1 used
• Average value product (AVP): the average value of output unit of
input X1 at each level of use of that input
• Marginal value product(MVP): the additional value of output
produced by each additional amount of the variable input
• Marginal factor cost (MFC): the amount added to total cost when
one more unit of the variable input x1 is used
Chapter four concepts
Categories of resources:
o Management: humans who are responsible for decision
making. Includes entrepreneurial functions of risk bearing,
organizing resources, resource decision making
o Capital: the physical or tangible resources used to aid or
enhance production
o Land: All physical characteristics of this input to yield a
product including the soil and the natural environment it is
contained with
o Labor: The physical act or effort of performing a task by
humans
• Formula for production function:
o Y=f(x1,x2,x3,…xn)
▪ Y product (output)
▪ F() is a function of, results from, depends on
▪ X1,X2,X3…Xn each of the resources (inputs) used to
produce the given product (output)
o Tomato example: when increasing the amount of tomatoes
you can have constant returns and changed proportions.
o Constant return is the doubling of all inputs like a cake recipe
therefore doubling the output.
o Changed proportion is where one input is changed and the
others are held constant resulting in a fixed output. This
graph will look concaved at a point and convex at a point
whereas the constant returns is a straight diagonal line
o Where the graph concaves the rate of increase of output is
slower than the rate of increase of input x
o Where the graph is convex the rate of increase in output is
faster than the rate of increase in input
o This graph proves the law of diminishing returns is in effect
o Law of diminishing returns states as successive amounts of a
variable input are combined with a fixed input in production
process, the total physical product will increase, reach a
maximum and eventually decline
o The total physical product is known as the output depicted on
the graph (also known as Y)
o
• MPP is marginal physical product. It can be found from the change
in output divided by the change in input.. which is
(triangle)TPP/triangle X1
• APP is the average physical product and can be found from the
output/input
• Relationship between MPP,TPP, and APP
o Where TPP switches from convex (U) to concave MPP is
maximized
o Stage II rational stage begins when APP=MPP and APP is
maximized
o Where MPP=0 (moves from positive to negative) ends stage
II of production and stage III begins irrational stage
o TPP is maximized where MPP=0
• Stage I is irrational because APP is still increasing throughout
• Stage III is irrational because MPP<0 therefore you generate kess
output from adding additional amounts of X1
•
• TVP-total value product: shows dollar worth of output produced by
different amounts of input x1 used
o Tvp=tpp*py
• AVP-average value product: average output per unit of input x1 at
each level of use of that inpuy
o TVP/x1=APP*Py
• MVP-marginal value product: additional value of output by each
additional amount of variable
o Change in TVP/ change in X1
• MFC- marginal factor cost- the amount added to the total cost when
one more unit of the variable input x1 is used
• MFCx1=Px1
• Optimum—MVP=MFC where one more unit of the variable input
adds to the revenue just what it cost
o 6.20=5.00
• net revenue approach—input usage maximize net revenue
o NR= TR-TC (TC=the x1 *MFC)
• Optimum—MVP is closest to MFC without being less MFC
o MVP=10 MFC=7----optimum
o MVP=6 MFC=7
• When price changes for x1---MVP=MFC=Px1a price changes for
quantity
•
Changing one variable and holding the others constant affects output
produced and net revenue generated is called factor-product relationship
Document Summary
Categories of resources: management: humans who are responsible for decision making. Changing one variable and holding the others constant affects output produced and net revenue generated is called factor-product relationship. All variables are considered fixed: ultimate long run: a span of time long enough that all resources are considered variable. Tvc: total variable costs: total spending for the variable input. Tfc: total fixed cost: the total costs of all other inputs that do not change as outputs changes. Tc: total cost: sum of total variables (tvc) and total foxed cost (tfc) Tr: total revenue: synonym to tvp in chap 5: p*total output level: pure profits: total revenue minus total cost. Average variable costs: amount spent on the variable input per unit of output. Average fixed cost: the cost of fixed resources per unit of output. Average total cost: total costs of all the resources used per unit of output produced.
