Costs of Production

What factors promote diseconomies of scale?

- Inefficiencies - Worker Alienation - Shirking Behavior

What factors promote economies of scale?

- Labor Specialization - Managerial Specialization (one person managing more people for same cost) - Efficient Capital

If market demand was 10 million and MES was 100,000, how many firms can the market support?

100 firms

Diminishing Marginal Returns

As input is increased, marginal product declines

Fixed Costs

Costs that do not vary with the quantity of output produced

Variable Costs

Costs that vary with the quantity of output produced

Economies of Scale

Decreasing long-run average total costs as output increases

What is the typical shape for an AFC curve?

Downward-sloping, flattens at end

Why are firms in industries with diseconomies of scale at relatively low outputs not typically large?

Firms with large outputs (beyond MES) can easily by underpriced by smaller, lower-cost firms

What is a good analogy for remembering how MC and ATC are related?

GPA (ATC) & Grade in Class (MC)

Diseconomies of Scale

Increasing long-run average total costs as output increases

What are the two main inputs for production?

Labor & Capital

Constant Returns to Scale

Long-run average total costs remain unchanged as output increases

How do you find the profit maximization point on a table?

Look for the highest amount of input that keeps marginal revenue product above marginal costs

Minimum Efficient Scale (MES)

Lowest output at which minimum average costs can be achieved

Formula for Marginal Revenue Product

Marginal Product of Labor * Price

How can a business decide how many firms a market can support?

Market Demand / Minimum Efficient Scale

What do economies of scope explain in business?

Mergers & Acquisitions

What does the intersection of the MC and ATC curves represent?

Minimum ATC

What symbol denotes marginal profit?

Mπ

What industry exhibits extensive economies of scale with limitless price reductions as output increases?

Natural Monopoly

Production Function Equation

Q = f(K,L)

Formula for Cost Effect of Economies of Scope

SC = (sum of costs of producing goods separately) - cost of producing goods jointly / (sum of costs of producing goods separately)

Formula for Average Total Cost

TC/Q

Formula for Average Fixed Cost

TFC/Q

Formula for Average Variable Cost

TVC/Q

Total Costs

The sum of fixed and variable costs

If the long-run average total costs continuously decline, what is the minimum efficient scale?

There is none

Accounting Profit

Total revenue - explicit costs

Economic Profit

Total revenue - explicit costs - implicit costs

True or False: In the long run, there are no fixed costs

True

True or False: In the short run, at least one of a firm's inputs is fixed

True

True or False: The cost function is the inverse of the production function

True

What is the typical shape for an ATC curve?

U (higher than AVC)

What is the typical shape for an AVC curve?

U (lower than ATC)

What is the typical shape for a MC curve?

Upward-sloping

Diseconomies of Scope

When the cost of producing two products together is higher than the cost of producing them separately

Learning Curve

When you produce more, you learn from the experience so that you produce at a lower cost in the future

Economies of Scope

savings that come from producing two (or more) outputs at less cost than producing each output individually

Marginal Product of Labor

the change in output from employing one additional unit of labor

Marginal Cost of Labor

the cost to the firm of hiring one more worker

Formula for Marginal Product of Labor

ΔQ / ΔL

Formula for Marginal Cost

ΔTC / ΔQ