Chapter 11 Output and costs
the three average costs of production
average fixed costs average variable costs average total cost
average product
equal to total product divided by the quantity of labor employed
marginal cost and average cost
marginal cost is calculated as the change in total cost divided by the change in output each average cost concept is calculated by dividing related total cost by output
to find the relationship between a firm's output decision and its costs, we distinguish between two decision time frames
short run long run
what does the total product curve show
the quantity a firm can produce with a given quantity of capital and different quantities of labor
total cost equation
TC = TFC + TVC
average and marginal product curves and cost curves
a firm's MP curve is linked to its MC curve. if the MP rises, the MC falls, if MC is at max, MP is at min a firm's AP curve is linked to its AVC curve. If a firm hires more labor, its average product diminishes and its average variable cost rises
long run
a time frame in which the quantities of all factors of production can be varied
short run
a time frame in which the quantity of at least one factor of production is fixed
why does the marginal product eventually diminish
an increasing quantity of labor must share a fixed quantity of capital - the law of diminishing returns
constant returns to scale
are features of a firm's tech that keep average total cost constant as output increases
economies of scale
are features of a firm's tech that makes average total cost fall as output increases
diseconomies of scale
are features of a firm's tech that makes average total cost rise as output increases
the law of diminishing returns
as a firm uses more of a variable factor of production with a given quantity of the fixed factor of production, the marginal product of the variable factor eventually diminishes
initially, why does the marginal product of labor increase as the quantity of labor increases
increased specialization and the division of labor
the shapes of the product curves are similar because almost every production process has 2 features:
increasing marginal return initially diminishing marginal returns eventually
long run average cost curve
is the relationship between the lowest attainable average total cost and output when the firm can change both the plant it uses and the quantity of labor it employs
minimum effect scale
is the smallest output at which long-run average cost reaches its lowest level
average total cost (atc)
is the total cost per unit of output ATC = AFC + AVC
average fixed cost (AFC)
is total fixed cost per unit of output
Average variable cost (AVC)
is total variable cost per unit of output
diminishing marginal returns
occur when the marginal product of an additional worker is less than the marginal product of the previous worker
sunk cost
past expenditures on a plant that has no resale value
the U shape of the ATC arises from the influnce of 2 opposing forces
spreading total fixed cost over a larger output eventually diminishing returns
the position of a firm's short-run cost curves depends on 2 factors
tech prices of factors of production
total cost (TC)
the cost of all the factors of production it uses
total fixed cost (TFC)
the cost of the firm's fixed factors
total variable cost (TVC)
the cost of the firm's variable factors
marginal cost
the increase in total cost that results from a one-unit increase in output
marginal product
the increase in total product that results from a one-unit increase in the quantity of labor employed, with all other inputs remaining the same
total product
the max output that a given quantity of labor can produce
the relationship between output and cost by using three cost concepts
total cost marginal cost average cost
what happens as output increase
total fixed cost is constant and total variable cost and total cost increase average fixed cost decreases and average variable cost, average total cost and marginal cost decrease at low outputs and increase at high outputs (cost curves are U-shaped)
the relationship between output and the quantity of labor employed by sing three related concepts:
total product marginal product average product
long-run average cost curve
traces the lowest attainable ATC when both labor and capital change
