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Economics 2

Lecture 15: Inputs and Output

short-run vs. long-run
relationship between output and resources

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Short-run vs. Long-run

In the short-run, the size of a firm's capital stock is fixed. They are unable to change it. In the long-run, all input levels can be changed.

Relationship Between Output and Resources

Total Physical Product

Total physical product, TPP, is the maximum output that can be produced when variable resources are added to a fixed amount of capital.

Marginal Physical Product

Marginal physical product, MPP, equals the additional units of output which result from using one more unit of the variable resource.

Average Physical Product

Average physical product, APP, equals the total output divided by the quantity of the variable input.

Here's an example of making these calculations:

number of workers	TPP	MPP	APP
	0		 0
	1		 3	 3	 3
	2		 9	 6	 4.5
	3		14	 5	 4.7
	4		16	 2	 4
	

The table above exhibits the law of diminishing returns: if more of one resource is employed while all other resources are held constant, eventually the MPP of that one resource must fall.

Note that:

• when MPP > APP, APP is increasing
• when MPP < APP, APP is decreasing

This same relationship between marginal and average will hold for marginal and average costs.

David A. Latzko Business and Economics Division Pennsylvania State University, York Campus office: 13 Main Classroom Building voice: (717) 771-4115 fax: (717) 771-4062 e-mail: web: www.yk.psu.edu/~dxl31