Theory Of the

Firm
We look at the different types of behaviour of
firms in relation to the market in wich they
operate and the nature of competition on
different markets

-Jocelyn Blink
Berapa?
Kenapa?
Gimana?
Profit dimana?
 3

“
Production Land
Capital
Labour
Enterprise

To Increase production wee need to add more the Factor of

production, but not always possible.
We need to think about

Cost, Time, Availability

”
 4

“
Q= f (C, L, R, T)
Q= Quantitas
C= Capital
L= Labour
R= Raw Materials
T= Technology

”
 5

Agenda
1. Explanation about Long run and Short Run (the difference)
2. Average Production and Marginal Production theory and grafic
explanation
3. Analize the relation between AP MP and Law of diminishing returns
4. Individual exercise (review and worksheet)
 6

Short run and Long Run Theory in Production

SHORT RUN LONG RUN

There are fixed and variable costs varies All Planning takes place in long run
from one industry to another

Period of time in which all factors of

Period of time in which at least 1 factors production are variable
of production is fix.

FIRMS PLAN IN THE LONG RUN

PRODUCE IN THE SHORT RUN
 7

Theory of Firm (Fixed and Variable)

Fixed Cost Variable

▰ A small burger shop ▰ Number of workers
▰ One Rerigerator (In the short run, output can
▰ One Grill only be increased by applying
▰ Some countertops more of the variable factors to
▰ Implements for making the fixed factors
burger
 8

Number Of Total TOTAL PRODUCT

Worker Product 120

0 0 100
95 97 97
1 20 90

UNITS (Total Product)

80 80
2 45
65
3 65 60

45
4 80 40

5 90
20 20
6 95
0 0
7 97 0 1 2 3 4 5 6 7 8

8 97 Labour
 9

Average Product and Marginal Product

Average Product: Output/ unit of the variable factor on average

𝑻𝑷
AP=
𝑽

Marginal Product: Extra output produced by extra unit

Δ𝑻𝑷 𝑻𝑷 𝟐−𝑻𝑷 𝟏
MP= =
Δ𝑽 𝑽𝟐 −𝑽𝟏
 𝑻𝑷 Δ𝑻𝑷 𝑻𝑷 𝟐−𝑻𝑷 𝟏
AP= MP= =
𝑽 Δ𝑽 𝑽𝟐 −𝑽𝟏

Total
Product Average Product Marginal Product

0 0

1 20 20 20

2 45 23 25

3 65 22 20

4 80 20 15

5 90 18 10

6 95 16 5

7 97 14 2

8 97 12 0
 Average Product
25
23 22
20 20 20
𝑻𝑷 Δ𝑻𝑷 𝑻𝑷 𝟐−𝑻𝑷 𝟏 18
AP= MP= Δ𝑽 = 15 16

Units
𝑽 𝑽𝟐 −𝑽𝟏 14
12
10

Total Average Marginal 5

Product Product Product
0
0 1 2 3 4 5 6 7 8
0 0
WORKER
1 20 20 20
Average Product Marginal Product
2 45 23 25
30
3 65 22 20
25
4 80 20 15
20
5 90 18 10
UNITS

15
6 95 16 5
10
7 97 14 2
5
8 97 12 0
0
0 1 2 3 4 5 6 7 8
WORKER
 Average Product Marginal Product
30

25
1
20

4
15

2
10

0 3
0 1 2 3 4 5 6 7 8
 13

Average Product Average Product Marginal Product

25 30
23 22
25
20 20 20
18 20
15 16

UNITS
Units

14
12 15
10
10

5 5

0 0
0 1 2 3 4 5 6 7 8 0 1 2 3 4 5 6 7 8
WORKER WORKER

Conclution 1
MP > AP → AP will rise
MP < AP → AP will fall
MP = AP → AP is maximised
 14

The Law of Diminishing Return

As extra units of a variable factor are added to a given

quantity of fixed factors,

The output from each The output per (/) unit of

additional unit of the the variable factor (AP)
variable factor (MP) will will eventually diminish
eventually diminish
 15

Labour TP AP MP

0 0
1 2
2 5
3 9
4 14
5 18
6 21
7 23
8 24
9 24
10 23
11 21
 16

Labour TP AP MP
1. Lengkapilah Tabel AP dan MP
2. Buatlah diagram TP (Total Product) 0 0 - -
3. Buatlah diagram Average Product (AP) 1 2 2 2
4. Buatlah Tabel diagram kombinasi AP 2 5 3
dan MP! 3 9 4(etc)
5. Penjelasan Diagram TP, mengapa bentuk TP 4 14
bentuknya seperti itu, mengapa penurunannya
5 18
sangat “smooth” dibagian akhir” dll
6 21
6. Penjelasan diagram MP, mengapa bisa minus. 7 23
Kaitkan dengan teori diminishing return.
Jika dibandingkan Bersama MP dan AP, apakah 8 24
Meningkat? Menurun? Ada letak pertemuan 9 24
dimana? 10 23
11 21