ch 11

The relationship between MC and ATC

1.At the minimum cost output, ATC=MC 2. At output less than the minimum cost output MC is less than ATC and ATC is falling 3. At output greater than the minimum cost output, MC is greater than ATC and ATC is rising

Fixed cost

A cost that depends on the quantity of output produced. It is the cost of the fixed cost. Fixed cost does NOT depend on the quantity of output produced in the short run.

Variable cost

A cost that depends on the quantity of output produced. It is the cost of the variable input.

Fixed input

An input whose quantity is fixed for a period of time and cannot be varied There are no fixed inputs in the LONG RUN

Variable input

An input whose quantity the firm can vary at any time

What do average total cost and marginal cost tell us?

Average total cost tells us the typical unit of output costs to produce. While marginal cost tells the producer how much one more unit of output costs to produce.

U shaped average total cost curve

Falls at low levels of output then rises at higher levels. falls then rises as output increases.

Long Run

Fixed cost can be chosen based on the level of output it expects to produce. High FC means a low VC Low FC means a high FC

What happens if MC is above ATC?

If MC is above ATC, ATC is rising

What happens if MC is less than ATC

If MC is less than ATC, AtC is decreasing

Total cost

Producing a given quantity of output is the sum of the fixed cost and the variable cost of producing that quantity of output. TC= FC+VC

Total product curve

Shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input.

Total cost curve

Shows how total cost depends on the quantity of output The total cost curve becomes steeper as more output is produced due to diminishing returns to the variable input.

What are the two opposing effects on average total cost if increasing output?

Spreading effect: The larger the output the greater the quantity of output over which fixed cost is spread, leading to lower average fixed cost Diminishing returns effect:The larger the output the greater the amount of variable input required to produce additional units leading to higher AVC

Marginal cost

The additional cost of each additional unit. MC= Change in total cost/ change in quantity of output MC slopes upward because there are diminishing returns to inputs.

Marginal product

The additional quantity of output that is produced by using one more unit of that input. marginal product= change in quantity/change in labor There are diminishing returns to an input when an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input. Due to diminishing returns to labor, the curve is negatively sloped

Average fixed cost

The fixed cost per unit of output AFC=FC/Q Average fixed cost falls as more output is produced because the numerator is a fixed cost but the denominator the quantity of output increases as more is produced.

What do marginal product and the quantity of output depend on?

The quantity of output and the marginal product of labor depend on the level of the fixed input.

Minimum cost output

The quantity of output at which ATC is lowest. The bottom of the u shaped average total cost curve

Production function

The relationship between the quantity of inputs a firm uses and the quantity of output it produces.

Long run

The time period in which all inputs can be varied. So firms can adjust the quantity of any input

Short run

The time period in which at least one input is fixed.

Average variable cost

The variable cost per unit of output AVC=VC/Q Average variable cost rises as output increases.

Average total cost

Total cost divided by quantity of output produced ATC= TC/Q

Increasing returns to scale aka economies

When long run ATC declines as output increases often arise from the increase in specialization

Decreasing returns to scale aka diseconomies of scale

When long run ATC increases as output increases

Constant returns to scale

When long run ATC is constant as output increases

specialization

is a method of production where a business, area or economy focuses on the production of a limited scope of products or services to gain greater degrees of productive efficiency within an overall system.

Long run average total cost curve

shows the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output.