Chapter 11

Economic costs

accounting/explicit costs + implicit costs

When the marginal product of labor is rising, the marginal cost of output is falling. When the marginal product of labor is falling, the marginal cost of output is rising.

When marginal cost is below average total cost, average total cost falls. When marginal cost is above average total cost, average total cost rises. Marginal cost = average total cost when average total cost is at its lowest point.

Average product of labor

total output produced by a firm divided by the quantity of workers. ex) 4 workers produce 600 pizzas 600/4=150 pizzas

average product of labor = average of the marginal products of labor

183.3 = (200+250+100) / 3 1. Whenever the marginal product of labor is greater than the average product of labor, the average product of labor must be increasing. ex) even if you get a low GPA first semester, if your GPA continuously increases, your average cumulative GPA will rise as well. 2. Whenever the marginal product of labor is less than the average product of labor, the average product of labor must be decreasing. The marginal product of labor = average product of labor at the quantity of workers for which the average of product of labor is at its maximum.

Constant returns to scale

The situation in which a firm's long run average costs remain unchanged as it increases output.

technological change

a change in the ability of a firm to produce a given level of output with a given quantity of inputs. positive technological change => more output using the same inputs due to many factors, such as faster machinery. negative technological change => less output using the same inputs due to factors, such as hiring less skilled workers or damages to the facilities.

explicit cost

a cost that involves spending money; sometimes called accounting costs because only explicit costs are used for company's financial records and paying taxes. ex) Jill starting a Pizza Parlor - workers wages and rent and electricity payments

Long-run average cost curve

a curve that shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed.

implicit cost

a non-monetary opportunity cost ex) salary from her previous job she gave up by quitting her job to start a new parlor herself + interest from withdrawing money from her bank account to start her pizza parlor

variable costs

costs that change as output changes ex) labor costs, raw material costs, and costs of electricity and other utilities = because as more outputs are produced, the labor costs, material costs, etc. increases as well.

fixed costs

costs that remain constant as output changes ex) lease payments for buildings, monthly fire insurance, and online advertising.

marginal cost

the change in a firm's total cost from producing one more unit of a good or service. =total cost/change in output MC = TC/delta Q

economic depreciation

difference between what one paid for at the beginning and what one would receive if sold later.

Average fixed cost

fixed cost divided by the quantity of output produced. AFC = FC/Q

opportunity cost

highest valued alternative that must be given up to engage in another activity.

total cost

the cost of all inputs a firm uses in production. =fixed cost + variable cost

Marginal product of labor

the additional output a firm produces as a result of hiring one more worker; resulting from division of labor and specialization. Output at first increases at an increasing rate with each additional worker hired causing production to increase by a larger amount than did the hiring of the previous worker. However, after a peak, hiring more workers while keeping everything else constant results in diminishing returns= production increases at a lower rate. Marginal product of labor (pizzas per worker per week) rises initially bc of specialization and division of labor/ then falls because of the effects of diminishing returns

Minimum efficient scale

the level of output at which all economies of scale are exhausted. Long run average cost is the least

short run

the period of time during which at least one of a firm's inputs is fixed ex) technology and the size of its physical plant -factory/store are fixed; number of workers hired is variable.

long run

the period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant; length time varies from firm to firm.

Law of diminishing returns

the principle that, at some point, adding more of a variable input, such as labor workers, to the same amount of a fixed input, such as capital (2 ovens), will cause the marginal product of the variable input (labor) to decline.

Technology

the processes a firm uses to turn inputs into outputs; dependent on many factors, such as, skills of the managers, training of the workers, speed and efficiency of the machinery and equipment.

production function

the relationship between the inputs employed by a firm and the maximum output it can produce with those inputs. ex) In Jill's Pizza Parlor, her short run production function is shown by the relationship between the quantity of workers and the quantity of pizzas produced with a set amount of 2 ovens.

Diseconomies of scale

the situation in which a firm's long run average costs rise as the firm increases output.

Economies of scale

the situation when a firm's long-run average costs fall as it increases the quantity of output it produces.

average total cost

total cost divided by the quantity of output produced. ATC = TC/Q ATC = AFC + AVC

Average variable cost

variable cost divided by the quantity of output produced. AVC = VC/Q