ECON 2302 Ch.22
QUIZ: The long-run average cost curve...
represents the various average costs attainable at the planning stage of the firm's decision making.
QUIZ: The law of diminishing marginal product is NOT responsible for the shape of...
total fixed cost curve.
HW: average product of labor formula
total product or output/total workers or input
QUIZ: If the firm can vary all factors of production, it is operating...
in the long run.
Plant size
the size of the facilities that a firm owns and operates to produce its output. -can be defined by square footage, maximum capacity, and other measures of the scale of production of goods
HW: average variable costs formula
total variable costs/total output
HW: marginal cost formula...
wage rate/marginal product
QUIZ: Why does the marginal product of labor eventually decline as more labor is used with another fixed input?
The labor will have, on average, fewer units of the other inputs to combine with and the increases to total output obtained from more labor will decrease.
HW: Which of the following is true about the long-run average cost curve?
The long-run average cost curve is the envelope of the firm's short-run average cost curves. -the long-run AVC curve is the locus (path) of points giving the least unit cost of producing any given rate of output
QUIZ: When marginal cost is falling...
marginal product must be rising.
QUIZ: A watch manufacturer finds that at 1,000 units of output, its marginal costs are above average total costs. If it produces an additional watch, its average total costs will...
rise.
HW: total cost curves....
start above the origin
HW: total variable cost curves....
start at the origin
HW: The law of diminishing marginal returns is caused by...
the existence of a fixed input that must be combined with increasing amounts of the variable input---> this is why marginal physical product eventually declines
QUIZ: The law of diminishing marginal returns is caused by...
the existence of a fixed input that must be combined with increasing amounts of the variable input.
QUIZ: When the long-run average cost curve is falling...
the firm is experiencing economies of scale.
HW: The planning horizon is defined as...
the long run, during which all inputs are variable -the long run is the period when all inputs can be changed and the firm can plan for future expansions
HW: When the total product function begins to increase at a decreasing rate...
-marginal product is falling -the law of diminishing returns has set in -marginal cost is rising
QUIZ:The minimum possible short-run average costs are equal to long-run average costs when...
the long-run curve is at a minimum point.
QUIZ: Suppose that a firm is currently producing 500 units of output. At this level of output, TVC = $10,000 and TFC = $25,000. What is the firms ATC?
$20 (total variable costs/total # of units)
HW: calculating fixed costs, variable costs, total costs, and average total costs from a graph
-fixed costs = average fixed cost X quantity -variable costs = average variable costs X quantity -total costs = variable cost + fixed cost -average total costs= total costs/# of units
QUIZ: When average variable costs are rising,
average physical product is falling.
QUIZ: The firm's short-run costs contain...
both variable and fixed costs.
QUIZ: Short-run cost relationships for a firm are...
determined by the law of diminishing marginal product.
HW: minimum efficiency scale (MES) on a long run average cost curve
point at the beginning of constant return of scale -definition: the lowest rate of output per unit of time at which long-run average costs for a firm are at a minimum
HW: monthly wage formula
variable cost/# of workers
QUIZ: Anthony's Chair Factory currently employs 100 workers, who produce 800 chairs. If Anthony hires a 101st worker, output will rise to 925. What is the average product of the 101st worker?
9.16 (total output/total # of workers)
LO#8 Explain how the long-run cost curve is related to short-run average cost curves.
-long-run curves are sometimes called planning curves, and the long run is sometimes called the planning horizon (the long run, during which all inputs are variable) -analysis: LONG-RUN cost curve~ consider a single firm contemplating the construction of a single plant. The firm has three alternative plant sizes from which to choose on the planning horizon. Each particular plant size generates its own SHORT-RUN average total cost curve. -in choosing the appropriate plant size for a single-plant firm during the planning horizon, the firm will pick the size whose SHORT-RUN average cost curve generates an average cost that is lowest for the expected rate of output. -U-shape is similar to the U shape of the short-run average cost curve. The reason behind the U shape of the two curves is NOT the SAME ---> the SHORT-RUN average cost curve is U-shaped because of the law of diminishing marginal product -> the law CANNOT apply to the LONG RUN-> in the long run, all factors of production are variable -> there is NO point of diminishing marginal product because there is NO fixed factor of production.
LO#7 Identify and graph AFC, AVC, ATC, and MC curves. (in notebook)
-marginal cost (MC) intersects average variable costs (AVC) at the average variable costs' minimum point. Also, MC intersects average total costs (ATC) at average total costs' minimum point
the law of diminishing marginal product IS responsible for the shape of...
-marginal cost curve -total cost curve -average variable cost curve
LO#10 Discuss Minimum Efficient Scale.
-the lowest rate of output per unit time at which the long-run average costs for a particular firm are at a minimum - the BLANK for the firm is encountered -> at the output rate when economies of scale end and constant economies of scale start -in any industry with a long-run average cost curve, larger firms will have no cost-saving advantage over smaller firms as long as the smaller firms have at least obtained the BLANK at it's point on a graph.
LO#6 Describe the relationship between Total Cost, Average Fixed Cost, Average Variable Cost, Average Total Cost, and Marginal Cost.
Average Variable Costs and Marginal Costs: -when MCs are LESS than average costs-> average costs must FALL ---> the only way average variable costs can FALL is if the extra cost of the marginal unit produced is LESS than the average variable cost of all the preceding units -when marginal costs are GREATER than average costs -> average costs must RISE ---> the only way average variable costs can RISE is if the variable cost of additional units is MORE than that for units already produced -example: if the average variable cost for two units of production is $4.00 a unit -> the only way for the average variable cost of THREE units to be LESS than that of TWO units is for the variable costs attributable to the last unit—the marginal cost—to be LESS than the average of the previous units. In this particular case, if average variable cost FALLS to $3.33 a unit, total variable cost for the THREE units would be 3X $3.33 (about $10.00)-> total variable cost for TWO units is 2X $4.00 (average variable cost), or $8.00 -> the marginal cost is therefore $10.00 - $8.00= $2.00, which is LESS than the variable cost of $3.33. Average Total Costs and Marginal Costs and Average Fixed Costs: -average total cost = total costs/number of units produced. -marginal cost does not include any fixed costs. Fixed costs are, by definition, fixed and cannot influence marginal costs. -example used can therefore be repeated, substituting average total costs for average variable costs.
LO#3 Define what is meant by diminishing marginal product and illustrate the concept in a table.
Law of diminishing marginal product: the observation that after some point, successive equal-size increases in a variable factor of production (such as labor) added to fixed factors of production will result in smaller increases in output. Graph/table: Marginal productivity (ex- additional output from adding more workers during a week) first increases, then decreases, and finally becomes negative. Example: -ONE worker, total output goes from 0 to 50 -> marginal product is 50 units per week. -TWO workers instead of one are hired -> total product goes from 50 to 110 units of output per week -> marginal product therefore increases to 60 units per week. -THREE workers rather than two are hired -> total product again increases, from 110 to 180 units of output per week-> marginal product rises to 70 units per week. -FOUR workers are hired instead of three-> total product rises from 180 to 240 units per week-> marginal product of only 60 units of cloud computing services per week. -------->Therefore, the point of diminishing marginal product occurs after THREE workers are hired.
LO#5 Define what is meant by marginal cost, explain how it is related to diminishing marginal product and the other cost curves, and sketch a graph of it in relationship to the other cost curves.
Marginal cost: the change in total costs due to a one-unit change in production rate -Example: if the production of 10 portable power banks per hour costs a firm $48 and the production of 11 portable power banks costs $56 per hour -> the MARGINAL COST of producing 11 rather than 10 portable power banks per hour is $8. -Formula: MC =change in total cost/change in output How MC is related to diminishing marginal product: -the U shape of the marginal cost curve is a result of increasing and then diminishing marginal product. -when diminishing marginal product sets in-> marginal product decreases -> and eventually becomes negative. -the MC must rise when the marginal product begins its decline. ---at the output at which marginal product starts to fall (after reaching the point of diminishing marginal product) -> marginal cost will begin to rise. How MC is related to other cost curves: -just as average variable costs and average total costs initially decrease with rising output and then increase, it must also be true that MC first falls with greater output and then rises ---over the range of output along which marginal product rises -> marginal cost will fall.
LO#2 Understand what is meant by a production function and be able construct a table illustrating this concept.
Production function: the relationship between inputs and maximum output -the relationship between maximum output and the quantity of capital and labor used in the production process -a technological relationship between inputs and output
LO#1 Distinguish between the short-run and the long-run
Short-run: the time period during which at least one input (such as plant size) cannot be changed. -during the short run, a firm makes do with whatever equipment/facilities it already has, no matter how much more it wants to produce because of increased demand for its product. -we consider the floor space and equipment, the size or amount of which cannot be varied in the short run, as fixed resources Long-run: the time period during which all factors of production can be varied. -in the long run, the firm can alter its plant size.
LO#4 Differentiate between variable and fixed costs in the short run.
Variable costs: costs that vary with the rate of production. -includes wages paid to workers and purchases of materials. -the more the firm produces -> the more labor it has to hire -> the more wages it has to pay. Fixed costs: costs that do not vary with output. -includes expenses like rent on a building -costs are fixed for a certain period of time (in the long-run though, they are a variable) -in the short run, capital is fixed -> all costs that do not vary—that is, all costs that do not depend on the rate of production -Example: the fixed costs incurred by a producer of portable power banks; this firm's total fixed costs will usually include the cost of the rent for its plant and equipment and the insurance it has to pay -> total fixed costs per hour are $10; total fixed costs are represented by the horizontal line at $10 per hour. They are invariant to changes in the daily output of portable power banks—no matter how many are produced, fixed costs will remain at $10 per hour.
LO#9 Define what is meant by economies of scale/diseconomies of scale and sketch a graph that illustrates these concepts.
economies of scale: DECREASES in long-run average costs resulting from increases in output. -when the firm is experiencing economies of scale, the long-run average cost curve slopes DOWNWARD; an INC in scale and production leads to a FALL in unit costs. diseconomies of scale: INCREASES in long-run average costs that occur as output increases -when the firm is experiencing diseconomies of scale, the long-run average cost curve slopes UPWARD; an INC in scale and production RISES/INC unit costs
QUIZ: The production function...
gives the maximum amount of output for a given level of inputs.
QUIZ: At the output rate at which diminishing marginal product begins, a firm will experience...
increasing marginal costs.
HW: The law of diminishing marginal returns shows the relationship between...
inputs and outputs for a firm in the short run. -refers to the eventual decrease in the marginal physical product. -marginal physical product = change in output/change in input.
QUIZ: The marginal cost curve always intersects the average total cost curve at the point at which the average total cost curve...
is at its minimum.