Quiz

Marginal Decisions

Marginal Decisions: A firm's decisions as to The output level to produce are typically marginal decisions, i.e., decisions to produce a few more or a few less units.

Marginal Decisions

Marginal decisionsn: Since marginal cost indicates the extra cost of producing one more unit of production, firms can decide how many units to produce in order to save production costs most effectively.

Relation of MC to AVC and ATC

Relation of MC to AVC and ATC The Marginal Cost curve intersects the Average Variable Cost (AVC) curve and the Average Total Cost (ATC) curve at their minimum point

The law of diminishing marginal returns

The Law of Diminishing Marginal Returns: This law states that as more and more of a variable input is added to a fixed input in short-run production, then the marginal product (that is, the marginal returns) of the variable input eventually declines.

Long run

The critical difference between the long run and the short run is the law of diminishing marginal returns.

Long run

The long run is a period of time in which at all inputs used for production and under the control of the producer are variable.

Production function

The quantity of output a firm produces depends on the quantity of inputs; this relationship is known as the firm's production function

Short run

The short run is a period of time in which at least one input used for production and under the control of the producer is variable and at least one input is fixed.

Total cost

Total Cost: The sum of fixed cost and variable cost at each level of output. increases by the same amount as variable cost Because the total cost is simply the variable cost + fixed cost, it is a graphically simple curve to outline.

Total product curve

Total Product Curve: The curve labeled TP is the total product curve, the total number of a good produced per hour for a given amount of labor.

Average product curve

Average Product Curve: The average product curve, labeled AP, indicates the average number of a good produced by a company's workers.

Firm

A firm is an organization that produces goods or services for sale. To do this, it must transform inputs into output.

Fixed Input

A fixed input is an input used in production and under the control of the producer that does not change during the time period of analysis (the short run).

AFC: average fixed costs

AFC: average fixed costs which is the total fixed cost divided by the quantity AFC = TFC/Q declines as output increases (spreading the overhead)

ATC > P > AVC

ATC > P > AVC: if price falls below average total cost, then the firm incurs an economic loss.

ATC: Average Total Cost

ATC: Average Total Cost ATC = TC/Q = TFC/Q + TVC/Q = AFC + AVC Can be found graphically by adding vertically the AFC and AVC curves Vertical distance between ATC and AVC curves measures AFC at any level of output The vertical distance between ATC and AVC curves will continue to decrease, as the AFC continues to decrease.

AVC: average variable costs

AVC: average variable costs which is the total variable cost divided by the quantity AVC = TVC/Q declines as variable resources (labor) increase output, reaches a minimum, and then increases again as the Law of Diminishing Returnsu sets in at the low levels of output production is relatively inefficient and costly.

Calculations

Calculations: (ΔTC / ΔQ)

Constant returns to scale

Constant Returns to Scale: This occurs if a proportional increase in all inputs under the control of a firm results in an equal proportional increase in production. In other words, a 10 percent increase in labor, capital, and other inputs, also results in an equal 10 percent increase in production.

Decreasing returns to scale

Decreasing Returns to Scale: This occurs if a proportional increase in all inputs under the control of a firm results in a less than proportional increase in production. In other words, a 10 percent increase in labor, capital, and other inputs, results in a production increase that is less than 10 percent.

Diseconomies of scale

Diseconomies of Scale: These occur if a firm experiences an increase in the long-run average cost due to proportional increases in all inputs. Diseconomies of scale result, in part, from decreasing returns to scale. If production increases less than inputs increase, then the average cost of production increases.

Economies of scale

Economies of Scale: These occur if a firm experiences a decrease in the long-run average cost due to proportional increases in all inputs. Economies of scale result, in part, from increasing returns to scale. If production increases more than inputs increase, then the average cost of production declines.

Fixed costs

Fixed Cost: costs that do not change with the level of output. Even if you produce nothing, you must still pay your fixed costs. Beyond current control Examples: Rental payments, interest on a firm's debts, insurance premiums, and a portion of deprecation on equipment and buildings, insurance premiums.

Increasing marginal returns

Increasing Marginal Returns: This occurs if each additional unit of a variable input added to a fixed input causes incremental production to increase. Decreasing Marginal Returns: This occurs if each additional unit of a variable input added to a fixed input causes incremental production to decrease.

Increasing returns to scale

Increasing Returns to Scale: This occurs if a proportional increase in all inputs under the control of a firm results in a greater than proportional increase in production. In other words, a 10 percent increase in labor, capital, and other inputs, results in a production increase that is greater than 10 percent.

MC and MP

MC and MP: Marginal product and marginal cost are reflective. When marginal product increases, marginal cost decreases. However, when diminishing returns set in, additional output requires more cost so marginal cost increases when marginal product decreases

Marginal product curve

Marginal Product Curve: The MP curve is the marginal product curve, and the one that is key to the study of short-run production. The MP curve indicates how the total production of good changes when an extra worker is hired.

Negative marginal returns

Negative Marginal Returns: This results if the addition of a variable input added to a fixed input actually causes the total production to decline.

P < AVC

P < AVC: If the price falls below average variable cost, then the firm is better off shutting production in the short run. By producing any output, it does not generate enough revenue to cover variable cost let alone any fixed cost. The loss incurred is greater than fixed cost. The firm can incur a smaller loss by producing zero output and paying fixed cost.

P > ATC

P > ATC: If price exceeds average total cost, then a firm generates an economic profit, that is, above normal profit, by producing at the quantity that equates marginal revenue and marginal cost.

The short run

The analysis of short-run production sets the stage to better understand the supply-side of the market.

Variable costs

Variable Cost: costs that change with the amount of output. Total Variable Costs are the sum of all of the variable costs, and costs that change with level of output. Variable costs first increase by a decreasing amount, but later it increase by increasing amounts (due to MP curve) Examples: payments for materials, fuel, power, transportation services, labor, etc. Can be controlled in the short run by changing production levels

Variable input

Variable Input: A variable input is an input used in production and under the control of the producer that does change during the time period of analysis (the short run)