Econ. 102 Ch. 22.1 - 22.3

average fixed costs (AFC)

(def.) total fixed costs divided by the number of units produced Average fixed costs continue to fall throughout the output range In fact, if we were to continue panel (c) of Figure 22-2 farther to the right, we would find that average fixed costs would get closer and closer to the horizontal axis. - That is because total fixed costs remain constant. As we divide this fixed number by a larger and larger number of units of output, the resulting AFC becomes smaller and smaller. In business, this is called "spreading the overhead."

production

Any activity that results in the conversion of resources into products that can be used in consumption. is any process by which resources are transformed into goods or services. Production includes not only making things but also transporting them, retailing, repackaging them, and so on. *Notice that the production relationship tells nothing about the worth or value of the inputs or the output*

economies of scale

Decreases in long-run average costs resulting from increases in output Reasons for economies of scale: - specialization - division of tasks or operations - dimensional factor - improved productive equipment

marginal cost and marginal product

It must also be the case that marginal cost declines when marginal product rises and increases when marginal product falls. Recall that marginal cost is defined as; MC = change in total cost /change in output Because the price of labor is assumed to be constant, the change in total cost depends solely on the unchanged price of labor, W. The change in output is simply the marginal product (MP) of the one-unit increase in labor. Therefore,

short-run average cost curves (calculating AVC, ATC, and AFC)

Now we want to look at average cost. *With the average cost concept, we are measuring cost per unit of output*. It is a matter of simple arithmetic to figure the averages of these three cost concepts. We can define them as follows: The arithmetic is done in columns 5, 6, and 7 in panel (a) of Figure 22-2. The numerical results are translated into a graphical format in panel (c). *Because total costs (TC) equal variable costs (TVC) plus fixed costs (TFC), the difference between average total costs (ATC) and average variable costs (AVC) will always be identical to average fixed costs (AFC)* - *That means that average total costs and average variable costs move together as output expands.*

average variable costs (AVC)

We assume a particular form of the curve for average variable costs. The form that it takes is U-shaped: First it falls; then it starts to rise. (It is possible for the AVC curve to take other shapes in the long run.) (def.) total variable costs divided by the number of units produced

computing average variable costs ex. #2

When two workers are employed, the total variable cost of labor is equal to $1,000 per worker per week multiplied by two workers per week, or $2,000 per week. Column 2 indicates that two workers produce a total product of 110 units of cloud computing services per week, which equals the average product of 55 units of output per week times the number of workers (2). Thus, average variable cost when two workers are employed is Hence, the second value of average variable in column 5 is $18.18 per unit of cloud computing services per week, which is equal to the $1,000 wage rate divided by the average product of 55 units of service output for the first unit of labor in column 3. Performing successive AVC computations at each quantity of labor yields the remaining values in column 5.

impt. finding (pg. 489)

production of output with the same set of labor inputs can be greater with workers in groups as long as the groups remain stable. If there is instability of group composition, production is greater with individualized worker tasks.

law of diminishing marginal product

(def.) The observation that after some point, successive equal-sized increases in a variable factor of production, such as labor, added to fixed factors of production will result in smaller increases in output. - As successive equal increases in a variable factor of production are added to fixed factors of production, there will be a point beyond which the extra, or marginal, product that can be attributed to each additional unit of the variable factor of production will decline. The law of diminishing marginal product is a statement about the relationships between inputs and outputs that we have observed across firms operating in industries producing wide varieties of goods and services.

marginal costs (def)

the change in total costs due to a one-unit change in production rate

a firm's production

A firm takes numerous inputs, combines them using a technological production process, and ends up with an output. There are, of course, a great many factors of production, or inputs. *Keeping the quantity of land fixed, we classify production inputs into two broad categories—capital and labor*

minimum cost points

At what rate of output of portable power banks per hour does our representative firm experience the minimum average total costs? Column 7 in panel (a) of Figure 22-2 shows that the minimum average total cost is $4.28, which occurs at an output rate of seven portable power banks per hour. We can also find this minimum cost by finding the point in panel (c) of Figure 22-2 We can also find this minimum cost by finding the point in panel (c) of Figure 22-2 where the marginal cost curve intersects the average total cost curve. This should not be surprising. When marginal cost is below average total cost, average total cost falls. When marginal cost is above average total cost, average total cost rises. *At the point where average total cost is neither falling nor rising, marginal cost must then be equal to average total cost* = When we represent this graphically, the marginal cost curve will intersect the average total cost curve at the latter's minimum. The same analysis applies to the intersection of the marginal cost curve and the average variable cost curve. When are average variable costs at a minimum? According to panel (a) of Figure 22-2, average variable costs are at a minimum of $2.60 at an output rate of five portable power banks per hour. This is where the marginal cost curve intersects the average variable cost curve in panel (c) of Figure 22-2.

computing marginal cost

Note in panel (a) of Figure 22-3 that when we go from zero labor input to one unit, output increases by 50 units of cloud computing services. Each of those 50 units of output has a marginal cost of $20. Now the second unit of labor is hired, and this individual costs the wage rate of $1,000 per week. Output increases by 60 units of cloud computing services. Thus, the marginal cost is $1,000÷60=$16.67. Column 6 of Figure 22-3 includes these and other marginal cost values. We see, for instance, that adding another unit of labor yields 70 additional units of service output, so marginal cost declines once more, to $1,000÷70=$14.29. The following unit of labor yields a marginal product of only 60 units of cloud computing services, so marginal cost increases to $1,000÷60=$16.67. - as marginal product increases, marginal cost decreases, and as marginal product decreases, marginal cost must increase. Thus, when marginal product reaches its maximum, marginal cost necessarily reaches its minimum.

diminishing marginal product

Note that in Figure 22-1, when four workers instead of three are employed each week, marginal product declines. The concept of diminishing marginal product applies to many situations.

the point of saturation

Notice that after ten workers per week, marginal product becomes negative. - This means that eleven workers instead of ten would reduce total product. Sometimes *this is called the point of saturation, indicating that given the amount of fixed inputs, there is no further positive use for more of the variable input* - We have entered the region of negative marginal product.

relationship b/w output and inputs

Output per time period = some function of capital and labor inputs

long-run average cost curve

The locus of points representing the minimum unit cost of producing any given rate of output, given current technology and resource prices

the long run

The long run can now be considered the period of time in which all inputs can be varied. Specifically, in the long run, the firm can alter its plant size. How long is the long run? That depends on each individual industry. For Wendy's or McDonald's, the long run may be four or five months, because that is the time it takes to add new franchises. For a steel company, the long run may be several years, because that's how long it takes to plan and build a new plant. An electric utility might need more than a decade to build a new plant.

the production function: a numerical example

The relationship between maximum output and the quantity of capital and labor used in the production process is sometimes called the production function The production function is a technological relationship between inputs and output. def. the relationship b/w inputs and maximum output. A production function is a technological, not an economic, relationship

total variable costs

Total variable costs are costs whose magnitude varies with the rate of production. Wages are an obvious variable cost. (The more the firm produces, the more labor it has to hire) - Therefore, the more wages it has to pay. Parts are another variable cost. To manufacture portable power banks, for example, lithium battery input must be bought. The more portable power banks that are made, the more lithium material that must be bought A portion of the rate of depreciation (wear and tear) on equipment that is used in the production process can also be considered a variable cost if depreciation depends partly on how long and how intensively the equipment is used Total variable costs are given in column 3 in panel (a) of Figure 22-2. These are translated into the total variable cost curve in panel (b). *Notice that the total variable cost curve lies below the total cost curve by the vertical distance of $10. This vertical distance, of course, represents total fixed costs*

marginal costs formula

change in total cost / change in output

fixed costs

costs that do not vary with output. Fixed costs typically include such expenses as rent on a building. These costs are fixed for a certain period of time (in the long run, though, they are variable)

variable costs

costs that vary with the rate of production. They include wages paid to workers and purchases of materials

computing average variable costs

ex. As we move from zero labor input to one unit in panel (a) of Figure 22-3, output increases from zero to 50 units of cloud computing services. The total variable costs equal the $1,000 wage per worker per week, times the number of workers (1). Because the average product (AP) of one worker (column 3) is 10, we can write the total product, 50, as the average product, 50, times the number of workers, 1. Thus, we see that

computing average variable costs ex.

ex. As we move from zero labor input to one unit in panel (a) of Figure 22-3, output increases from zero to 50 units of cloud computing services. The total variable costs equal the $1,000 wage per worker per week, times the number of workers (1). Because the average product (AP) of one worker (column 3) is 10, we can write the total product, 50, as the average product, 50, times the number of workers, 1. Thus, we see that Consequently, the first value of average variable cost in column 6 is $20 per unit of cloud computing services per week, which is equal to the $1,000 weekly wage rate divided by the average product of 50 units of services for the first unit of labor in column 3.

marginal product

the output that is due to the addition of one more unit of a variable factor of production. The change in total product occurring when a variable input is increased and all other inputs are held constant

plant size

the size of the facilities that a firm owns and operates to produce its output. Plant size can be defined by square footage, maximum capacity, and other measures of the scale of production of goods or services

total costs

the sum of total fixed costs and total variable costs

long run

the time period during which all factors of production can be varied

short run def.

the time period during which at least one input, such as plant size, cannot be changed

average product

total product/ variable input

short run and long run

*Short run and long run in our discussion are terms that apply to planning decisions made by managers* Managers routinely take account of both the short-run and the long-run consequences of their behavior. *While always making decisions about what to do today, tomorrow, and next week—the short run as it were—they keep an eye on the long-run net benefits of all short-run actions* ----------> As an individual, you have long-run plans, such as going to graduate school or having a successful career, and you make a series of short-run decisions with these long-run plans in mind.

properties of the production function

*The production function specifies the maximum possible output that can be produced with a given amount of inputs* - It also specifies the minimum amount of inputs necessary to produce a given level of output Firms that are inefficient or wasteful in their use of capital and labor will obtain less output than the production function will show. No firm can obtain more output than the production function allows, however. *The production function also depends on the technology available to the firm*. - It follows that an improvement in technology that allows the firm to produce more output with the same amount of inputs (or the same output with fewer inputs) = results in a new production function.

graphing the marginal product of labor

A hypothetical set of numbers illustrating the law of diminishing marginal product is presented in panel (a) of Figure 22-1. The numbers are presented graphically in panel (c). Marginal productivity (additional output from adding more workers during a week) first increases, then decreases, and finally becomes negative. When one worker is hired, total output goes from 0 to 50. Thus, marginal product is 50 units of cloud computing services per week. When two workers instead of one are hired, total product goes from 50 to 110 units of output per week. Marginal product therefore increases to 60 units of cloud computing services per week. When three workers rather than two are hired, total product again increases, from 110 to 180 units of output per week, so marginal product rises once more, to 70 units per week. Then when four workers are hired instead of three, total product rises from 180 to 240 units per week. This represents a marginal product of only 60 units of cloud computing services per week. Therefore, *the point of diminishing marginal product occurs after three workers are hired*

evaluating the shapes of the AVC and ATC Curves

Because AVC = W/AP, average variable cost decreases as average product increases, and increases as average product decreases. AVC reaches its minimum when average product reaches its maximum. Finally, we know that ATC= AVC + AFC. Thus, the average total cost curve inherits the relationship between the average variable cost and average product.

diminishing marginal product (explanation)

Beyond some point, marginal product must begin to diminish as more workers are hired—not because additional workers are less qualified but *because each worker has, on average, less equipment with which to work (remember, all other inputs are fixed)* In Figure 22-1, *when four workers instead of three are hired to use two pieces of equipment, the fourth worker must perform subsidiary tasks*, such as reconfiguring computer servers or redirecting computational flows Total production of services rises, but not by as much as was the case when three workers rather than two were hired. Consequently, as you can see in column 4 of panel (a) of Figure 22-1, the marginal product when four workers instead of three are hired is 60 units, which is lower than the 70 units of output gained when three workers are hired instead of two. - In fact, *eventually the firm's plant will become so crowded that workers will start to get in each other's way. At that point, marginal product becomes negative, and total production declines*

Measuring Diminishing Marginal Product

How do we measure diminishing marginal product? - First, we limit the analysis to only one variable factor of production (or input)—let's say the factor is labor. *Every other factor of production, such as physical equipment, must be held constant*. Only in this way can we calculate the marginal product from utilizing more workers with the fixed factors, including equipment, and know when we reach the point of diminishing marginal product.

total variable costs ex. explanation

In panel (a), the derivations of columns 4 through 9 are given in parentheses in each column heading. For example, in column 6, average variable costs are derived by dividing column 3, total variable costs, by column 1, total output per hour. Note that marginal cost (MC) in panel (c) intersects average variable costs (AVC) at the latter's minimum point. Also, MC intersects average total costs (ATC) at that latter's minimum point. It is a little more difficult to see that MC equals AVC and ATC at their respective minimum points in panel (a) because we are using discrete one-unit changes. You can see, though, that the marginal cost of going from 4 units per hour to 5 units per hour is $2 and increases to $3 when we move to 6 units per hour. Somewhere in between, it equals AVC of $2.60, which is in fact the minimum average variable cost. The same analysis holds for ATC, which hits its respective minimum at 7 units per day at $4.28 per unit. MC goes from $4 to $5 and just equals ATC somewhere in between. *where the MC curve passes the AVC and ATC, those points are at minimum*

the short run

In the theory of the firm, the short run is defined as any time period so short that there is at least one input, such as current plant size, that the firm cannot alter In other words, during the short run, a firm makes do with whatever equipment and facilities it already has, no matter how much more it wants to produce because of increased demand for its product. *We consider the floor space and equipment, the size or amount of which cannot be varied in the short run, as fixed resources. In agriculture and in some other businesses, land may be a fixed resource* *There are, of course, variable resources that the firm can alter when it wants to change its rate of production*. These are called *variable inputs or variable factors of production*. (Typically, the variable inputs of a firm are its labor and its purchases of raw materials.) In the short run, in response to changes in demand, the firm can, by definition, change only the amounts of its variable inputs.

average costs and average product

In this example, labor is the only variable input. Furthermore, each unit of labor can be purchased at a constant wage rate, W, of $1,000 per worker per week. - Under these assumptions, it is straightforward for us to *calculate average variable costs at each quantity of labor*

total fixed costs

Let's look at an ongoing business such as Apple. The decision makers in that corporate giant can look around and see facilities, thousands of parts, huge buildings, and a multitude of other components of plant and equipment that have already been acquired and are in place. - As long as Apple intends to produce positive amounts of digital devices, *it has to take into account expenses to replace some worn-out equipment, no matter how many devices it produces.* (The opportunity costs of any fixed resources that Apple owns will all be the same regardless of the rate of output. *In the short run, these costs are the same for Apple no matter how many digital devices it produces*) We also have to point out that the opportunity cost (or normal rate of return) of capital must be included along with other costs. *Remember that we are dealing in the short run, during which capital is fixed*. This leads us to a very straightforward definition of fixed costs: - *All costs that do not vary—that is, all costs that do not depend on the rate of production—are called fixed costs* (EX.) Let's now take as an example the fixed costs incurred by a producer of portable power banks. This firm's total fixed costs will usually include the cost of the rent for its plant and equipment and the insurance it has to pay. - We see in panel (a) of Figure 22-2 that total fixed costs per hour are $10. In panel (b), these total fixed costs are represented by the horizontal line at $10 per hour. They are invariant to changes in the daily output of portable power banks—no matter how many are produced, fixed costs will remain at $10 per hour.

total product

Panel (b) shows a total product curve, or the maximum feasible service output when we add successive equal-sized units of labor while *holding all other inputs constant*. *The graph of the production function in panel (b) is not a straight line*. It peaks at about ten workers per week and then starts to go down.

an example of the law of diminishing marginal product

Production of cloud computing services provides an example of the law of diminishing marginal product. With a fixed amount of plant space available to workers, digital equipment, and computer software and digital apps, *the addition of more workers eventually yields successively smaller increases in output* After a while, when all the equipment and software are being used, additional workers will have to start producing services and troubleshooting quality problems manually. Output will not rise as much as when workers were added before this point, because the digital equipment and software are all in use. The marginal product of adding a worker, given a specified amount of capital, must eventually be less than that for the previous workers.

minimum efficient scale (MES)

The lowest rate of output per unit time at which long-run average costs for a particular firm are at a minimum (Small MES relative to industry demand) - There is room for many efficient firms. - High degree of competition (Large MES relative to industry demand) - There is room for only a small number of efficient firms. - Small degree of competition ex.'s boosting MES - Briggs & Stratton Corp. moved from a massive 2 million square foot facility in Milwaukee where it was located in the 1990s. - Today, it has dispersed its production among six smaller plants, each of which utilizes more automated equipment and employs fewer workers than during the 1990s. //////////////// ex. #2 - Downsizing its plants enabled the company to increase its overall scale of operations, from an output rate of 8 million engines per year to more than 10 million engines per year. - The result of this output increase has been lower long-run average total cost, which has helped to boost the company's annual profitability by more than 30%.

initially increasing marginal product

The marginal product of labor may increase rapidly at the very beginning. Suppose that a firm starts with no workers, and only two pieces of equipment. When the firm hires one worker instead of zero, that individual can use both of the firm's pieces of equipment for producing output, so production jumps. Then, when the firm hires two workers instead of just one, each of the two individuals can utilize a piece of equipment to produce output, and production leaps upward again Indeed, the marginal product from hiring two workers instead of one may be greater than hiring one worker instead of zero. This is the situation displayed in Figure 22-1, in which hiring two workers instead of one yields a marginal product of 60 units of service output, which exceeds the 50 units of output gained when one worker is hired instead of zero.

average variable costs and marginal costs

There is a similar relationship between average variable costs and marginal costs. As shown in Figure 22-2, when marginal costs are less than average costs, the latter must fall. Conversely, when marginal costs are greater than average costs, the latter must rise. When you think about it, the relationship makes sense. The only way average variable costs can fall is if the extra cost of the marginal unit produced is less than the average variable cost of all the preceding units. For example, if the average variable cost for two units of production is $4.00 a unit, the only way for the average variable cost of three units to be less than that of two units is for the variable costs attributable to the last unit—the marginal cost—to be less than the average of the previous units. In this particular case, if average variable cost falls to $3.33 a unit, total variable cost for the three units would be three times $3.33, or about $10.00. Total variable cost for two units is two times $4.00 (average variable cost), or $8.00. The marginal cost is therefore $10.00 minus $8.00, or $2.00, which is less than the variable cost of $3.33. A similar type of computation can be carried out for rising average variable costs. The only way average variable costs can rise is if the variable cost of additional units is more than that for units already produced. But the incremental cost is the marginal cost. In this particular case, the marginal costs have to be higher than the average variable costs.

the relationship b/w diminishing marginal product and cost curves

There is a unique relationship between output and the shape of the various cost curves we have drawn. To illustrate this fact, let's return to our example involving production of cloud computing services from Figure 22-1. Columns 1 and 2 in panel (a) of Figure 22-3 display labor input and total product levels considered in Figure 22-1, which are graphed as the total product curve displayed in panel (b) of the figure. Columns 3 and 4 list for each labor input level the corresponding values of average product and marginal product. As will be explained below, columns 5 and 6 display resulting values for average variable costs and marginal costs. -*It turns out, you will see, that if wage rates are constant, the shapes of the average cost and marginal cost curves in panel (d) of Figure 22-3 are both reflections of and consequences of the law of diminishing marginal product*. Let's consider why this is so. \\ fig. explanation: - As the number of workers employed each week increases, the total number of units of cloud computing services produced each week rises, as shown in panels (a) and (b). In panel (c), marginal product (MP) first rises and then falls. Average product (AP) follows. The near mirror image of panel (c) is shown in panel (d), in which MC and AVC first fall and then rise. Panel (d) of Figure 22-3 plots these average variable costs listed in column 5 of panel (a). The result, as you can see, is the familiarly U-shaped average variable cost curve. Panel (c) displays the values of average product in column 4 of panel (a). We see that the average product increases, reaches a maximum, and then declines.

average total costs and marginal costs

There is also a relationship between marginal costs and average total costs Remember that average total cost is equal to total costs divided by the number of units produced. Also remember that marginal cost does not include any fixed costs. - Fixed costs are, by definition, fixed and cannot influence marginal costs. *Our example can therefore be repeated, substituting average total costs for average variable costs* These rising and falling relationships can be seen in panel (c) of Figure 22-2, where MC intersects AVC and ATC at their respective minimum points.

the relationship b/w average and marginal costs

There is always a definite relationship between averages and marginals. Consider the example of 10 football players with an average weight of 250 pounds. An eleventh player is added. His weight is 300 pounds. That represents the marginal weight. What happens now to the average weight of the team? It must increase. That is, when the marginal player weighs more than the average, the average must increase. Likewise, if the marginal player weighs less than 250 pounds, the average weight will decrease.

average total costs (ATC)

This curve has a shape similar to that of the AVC curve. Nevertheless, it falls even more dramatically in the beginning and rises more slowly after it has reached a minimum point. It falls and then rises because average total costs are the vertical summation of AFC and AVC. Thus, when AFC and AVC are both falling, ATC must fall too. At some point, however, AVC starts to increase while AFC continues to fall. Once the increase in the AVC curve outweighs the decrease in the AFC curve, the ATC curve will start to increase and will develop a U shape, just like the AVC curve. (def.) total costs divided by the number of units produced; *sometimes called average per-unit total costs*

explaining the shape of the marginal cost curve

Thus, when marginal product initially rises from 50 units of service output per unit of labor to 70 units of output per unit of labor, marginal cost correspondingly declines from $20 per unit of cloud computing services to $14.29 per unit. Then when marginal product diminishes to 60 units of output per unit of labor and then to 50 units of output per unit of labor, marginal cost increases to $16.67 per unit of service output and then to $20 per unit. Hence, in panel (b) of Figure 22-3, which shows the values of marginal cost from column 5 at corresponding service output rates from column 2, the marginal cost curve initially slopes downward as the firm hires the first, second, and third units of labor. The marginal cost curve slopes upward for output rates beyond the output rate at which the marginal product of labor begins to diminish, which is when the fourth unit of labor is employed. straightforwardly------> - Firms' short-run cost curves are a reflection of the law of diminishing marginal product. Given any constant price of the variable input, marginal costs decline as long as the marginal product of the variable resource is rising. At the point at which marginal product begins to diminish, marginal costs begin to rise as the marginal product of the variable input begins to decline. (The result is a marginal cost curve that slopes down, hits a minimum, and then slopes up)

short-run costs to the firm

To make this example simple, assume that there are only two factors of production, capital and labor. - *Our definition of the short run will be the time during which capital is fixed but labor is variable* In the short run, a firm incurs certain types of costs. We label all costs incurred *total costs*. Then we break total costs down into total fixed costs and total variable costs, which we will explain shortly. Therefore, Totalcosts(TC)=total fixed costs(TFC)+total variable costs(TVC)

average and marginal product

To understand the shape of the total product curve, let's examine columns 3 and 4 of panel (a) of Figure 22-1—that is, average and marginal products. *Average product* is the total product divided by the number of worker-weeks. You can see in column 3 of panel (a) of Figure 22-1 that the average product of labor first rises and then steadily falls after four workers are hired. Marginal means "additional," so the *marginal product* of labor is the change in total product that occurs when a worker is added to a production process for a given interval. (Keep in mind that we always measure output of goods and services in terms of amounts of services or material quantities of goods, not in dollar terms.) *The marginal product of labor therefore refers to the change in output caused by a one-unit change in the labor input* as shown in column 4 of panel (a) of Figure 22-1.

marginal costs

We have stated repeatedly that the basis of decisions is always on the margin—movement in economics is always determined at the margin. This dictum also holds true within the firm. *Firms, according to the analysis we use to predict their behavior, are very concerned with their marginal costs* Because the term marginal means "additional" or "incremental" (or "decremental," too) here, *marginal costs refer to costs that result from a one-unit change in the production rate* For example, if the production of 10 portable power banks per hour costs a firm $48 and the production of 11 portable power banks costs $56 per hour, the marginal cost of producing 11 rather than 10 portable power banks per hour is $8. This marginal cost schedule is shown graphically in panel (c) of Figure 22-2. Just as average variable costs and average total costs initially decrease with rising output and then increase, it must also be true that marginal cost first falls with greater output and then rises. *The U shape of the marginal cost curve is a result of increasing and then diminishing marginal product* - At lower levels of output, the marginal cost curve declines. The reasoning is that as marginal product increases with each addition of output, the marginal cost of this last unit of output must fall. Conversely, when diminishing marginal product sets in, marginal product decreases (and eventually becomes negative). It follows that the marginal cost must rise when the marginal product begins its decline. - Over the range of output along which marginal product rises, marginal cost will fall. At the output at which marginal product starts to fall (after reaching the point of diminishing marginal product), marginal cost will begin to rise.

production example

the production of cloud computing services Panel (a) of Figure 22-1 shows a production function relating maximum output of cloud computing services in column 2 to the quantity of labor in column 1. Zero workers per week produce no service output Five workers per week of input provide services that yield a total output of 290 units of cloud computing services per week. (Ignore for the moment the rest of that panel.) Panel (b) of Figure 22-1 displays this production function. - It relates to the short run, because plant size is fixed, and it applies to a single firm. - Marginal product is the addition to the total product that results when one additional worker is hired (for a week in this example). Thus, in panel (a), the marginal product of adding the fourth worker is 60 units of cloud computing services. With four workers, 240 units of services are produced, but with three workers, only 180 units are produced. The difference is 60 units of output. - In panel (b), we plot the numbers from columns 1 and 2 of panel (a). In panel (c), we plot the numbers from columns 1 and 4 of panel (a). When we go from 0 to 1, marginal product is 50 units of output. When we go from one worker to two workers, marginal product increases to 60, and when we go from two workers to three workers, marginal product rises again, to 70 units. - After three workers, marginal product declines, but it is still positive. *Total product (output) reaches its peak at about ten workers, so after ten workers, marginal product is negative*. When we move from ten to eleven workers, marginal product becomes −10 units of output per week.