CH11

the long run

a time frame in which the quantities of all factors of production can be varied. that is , the long run is a period in which the firm can change its plant. to increase output in the long run a firm can change its plant as well as the quantity of labor it hires.

constant returns to scale

are features of a firms technology that keeps average total cost constant as output increases. when constant returns to scale occur the LRAC curve is horizontal

the law of diminishing returns states that...

as a firm uses more of a variable factor of production with a given quantity of the fixed factor of production, the marginal product of the variable factor eventually diminishes

example of increasing marginal returns

if campus sweaters employs one worker, that person must learn all the aspects of sweater production: running the knitting machiens, fixing breakdowns, packaging and mailing sweaters, buying and cheking the type and color of the wool. if campus sweaters hires a second worker, the two workers can specialize in different parts of the production process and can produce more than twice a much as one worker. the marginal product of the second worker is greater than the marginal product of the first worker so marginal returns are increasing

to increase output in the short run a firm must...

increase the quantity of labor employed

as output increases further marginal cost eventually ... bc of the law of diminishing returns

increases

total cost

is the cost of all the factors of production it uses.

minimum efficient scale

is the smallest output at which long run average cost reaches its lowest level

three average costs of production are ...

1. average fixed cost 2. average variable cost 3. average total cost

almost every production process has two features ... (2)

1. increasing marginal returns initially 2. diminishing marginal returns eventually

the U shape of the ATC curve arises from the influence of two opposing forces... (2)

1. spreading total fixed cost over a larger output 2. eventually diminishing returns

the position of a firms short run cost curve depends on two factors... (2)

1. technology 2. prices of factors of production

to produce more output in the short run, a firm must employ more labor which means that it must increase its costs. we describe the relationship between output and cost by using three cost concepts (3)

1. total cost 2. marginal cost 3. average costs

we separate total costs into ... (2)

1. total fixed cost 2. total variable cost

to describe the relationship between output and the quantity of labor employed we use three related concepts... (3)

1. total product 2. marginal product 3. average product

the short run

a time frame in which the quantity of at least one factor of production is fixed. for most firms, capital, land and entrepreneurship are fixed factors of production and labor is the variable factor of production.

marginal cost

change in total cost resulting from a one unit increase in total product MC= change in TC / change in Q

marginal product of capital

change in total product divided by the change in capital when the quantity of labor is constant

total fixed cost

cost of the fixed factors of production

total variable cost

cost of the variable factors of production

fixed cost

cost that is independent of the output level; cost of a fixed factor of production

variable cost

cost that varies with the output level; cost of a variable factor of production

at small outputs, marginal cost.... as output.... because of greater specialization and the division of labor

decrease....increases

economies vs diseconomies of scale

economies of scale are features of a firms techonology that make average total cost fall as output increases. diseconomies of scale are features of a firms technology that make average total cost rise as output increases.

diminishing marginal returns

occurs when the marginal product of an additional worker is less than the marginal product of the previous worker. as more workers are added, there is less and less for the additional workers to do that is productive.

in a market in which the minimum efficient scale is large relative to market demand...

only a small number of firms or possibly one firm can make a profit and the market is either an oligopoly or monopoly

sunk cost

past expenditure on a plant that has no resale value

the fixed factors of production are called the firms....

plant. in the short run the firms plant is fixed

the behavior of long run cost depends on the firms...

production function

average product

tells how productive workers are on average. it is equal to total product divided by the quantity of labor employed.

marginal cost

the increase in total cost that results from a one unit increase in output. we calculate MC as the increase in total cost divided by the increase in output.

marginal product

the increase in total product that results from a one unit increase in the quantity of labor employed, all other inputs remaining the same

increasing marginal returns occur when...

the marginal product of an additional worker exceeds the marginal product of the previous worker

in a market in which the minimum efficient scale is small relative to market demand...

the market has room for many firms and the market is competitive

total product

the maximum output that a given quantity of labor can produce

long run average cost curve

the relationship between the lowest attainable average total cost and output when the firm can change both the plant it uses and the quantity of labor it employs

production function

the relationship between the maximum output attainable and the quantities of both labor and capital

average total cost

total cost per unit of output ATC=AFC+AVC

average fixed cost

total fixed cost per unit of output AFC=TFC/Q

output (total product)

total quantity produced

average variable cost

total variable cost per unit of output AVC=TVC/Q