Economics Chapter 7

does not exist because there are no fixed cost in the long run

AFC in the long run

MC<ATC

ATC decreases when_____

MC>ATC

ATC increases when ____

it is below MC

ATC is always positively sloped when

U-shaped AVC

AVC decreases at first, hits a minimum, and then rises as output increases (as a result of diminishing returns).

law of diminishing returns

Added output begins to decrease and ultimately goes negative as more and more workers are added with no increase in capital.

marginal cost

As MPP diminishes, it takes more variable input to make a product, so ______ rise.

marginal cost increases

As _____ , it intersects ATC at its minimum point.

variable cost

At zero output, these costs are zero. As output increases, ______ increase rapidly at first, then more slowly, and finally very fast as the firm approaches maximum capacity.

It declines at first, hits a minimum, then rises sharply.

Describe the graphical portrayal of the marginal cost curve:

lowest

Each short-run ATC curve point that touches the long-run ATC curve, also known as the planning curve, shows the _____ unit cost attainable for different output levels when the firm has had time to make all desired changes to its plant size.

minimum average costs

However, this amount of output is not necessarily the output where profit is maximized.

diseconomies of scale must exist

If a firm doubles the size of all of its inputs and the output does not double, then

diseconomies of scale

If the plant size gets too big, however, long-run average costs begin to rise, creating

MPP equals zero

If wages in an economy are zero, then a firm should hire workers until

constant returns

In production, _______ __________ to scale occur between economies and diseconomies of scale, where long-run average costs do not change as output continues to increase.

lowest average total cost

It is at this point where the long-run marginal cost curve intersects the long-run average total cost curve.

lower

Long run: As plant size gets larger, each plant's ATC curve has a _____ minimum point. In this case, building a larger plant would _____ production costs.

fixed costs

Must be paid even if output is zero. Do not increase as output increases.

Operating efficiency may be reduced. Worker alienation may increase. Rigid corporate structures emerge. Off-site management may be unresponsive.

Result of diseconomies of scale:

Larger plants reduce minimum average costs. Greater efficiency (will decrease cost) may come from Specialization vs. multi-function workers. Mass production vs. small batch mode production.

Result of economies of scale:

short run

The ______ is characterized by fixed costs.

Marginal cost in the short run

The law of diminishing returns affects

no input is fixed in quantity

The long run is best defined as the period when

economies, diseconomies

The long-run, U-shaped average total cost curve derives its shape from _______ of scale, then _____ of larger production

marginal physical product

The measure of added output as labor increases is

minimal

The output at which ATC switches from being dominated by AFC to being dominated by rising AVC is the point where average costs are ______

the lowest average total cost at which any chosen output level can be produced after the firm has had time to make adjustments in plant size.

What does the long-run average total-cost curve show?

average fixed cost at a specific level of output

What does the vertical distance between the average total cost and average variable cost curves measure?

accountants

Who factors in explicit cost?

economists

Who factors in implicit cost?

economic, opportunity

____ costs are payments made by firms to attract the resources they need away from alternate production opportunities.

marginal physical product

_____________ goes up at low levels of output but peaks and then diminishes throughout other levels of production.

marginal physical product

_____________ is zero when total output is at its maximum.

explicit costs

a payment made for the use of a resource.

long run

a period of time long enough for all inputs to be varied. There are no fixed costs in the _____. All costs are variable.

Falling AFC

as output increases, AFC _____ rapidly.

U-shaped ATC

at low output, falling AFC dominates and ATC decreases. As output increases, rising AVC begins to dominate. ATC hits a minimum, then begins to rise.

marginal cost

change in total cost/ change in output

fixed cost

costs of production that don't change when the rate of output is altered.

variable cost

costs of production that don't change when the rate of output is altered.

Economic cost

explicit cost + implicit cost

are used in production but are not paid for monetarily

implicit costs are those that:

economies of scale

reductions in minimum average costs that come through increases in the size (scale) of plants and equipment.

production function

shows the maximum quantity of a good attainable from different combinations of factor inputs.

marginal cost

the increase in total cost associated with a one-unit increase in production.

minimum

the long-run average total cost curve is derived from the _____ points of tangency of each of the short-run ATC curves.

diminishing

the marginal cost curve's shape is a consequence of the law of ______ returns.

law of diminishing returns

the marginal physical product of a variable input declines as more of it is employed with a given quantity of other (fixed) inputs.

total cost

the market value of all resources used to produce a good or service.

implicit cost

the value of resources used in production, even when no direct payment is made.

ATC

total cost divided by the quantity of output in a given time period.

AFC

total fixed cost divided by the quantity of output in a given time period.

AVC

total variable cost divided by the quantity of output in a given time period.