ECON Chapter 11

When do diminishing returns to inputs occur?

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

When do increasing returns to scale happen?

when long-run average total cost declines as output increases

When do decreasing returns to scale happen?

when long-run average total cost increases as output increases

When do constant returns to scale happen?

when long-run average total cost is constant as output increases

What are the three principles of the minimum average total cost curve?

1. At the minimum cost output, average total cost is equal to marginal cost 2. At output less than the minimum cost output, marginal cost is less than average total cost and average total cost is falling 3. At output greater than the minimum cost output, marginal cost is greater than average total cost and average total cost is rising

Why does the average total cost change when fixed cost is increased?

When the output is low, the increase in fixed cost form the additional equipment outweighs the reduction in variable cost from higher worker productivity -- that is there are too few units of output over which to spread the additional fixed cost.

What is a variable cost?

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

What is a fixed cost?

a cost that dies not depend on the quantity of output produced. it is the cost of the fixed input

What is a fixed input?

an input whose quantity is fixed for a period of time and cannot be varied

What is a variable input?

an input whose quantity the firm can vary at any time

What does a U-shaped average total cost mean?

falls at low levels of output, then rises at higher levels

What is the 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

What is the total cost curve?

shows how total cost depends on the quantity of output

What is the 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

What is the marginal product of an input?

the additional quantity of output that is produced by using one more unit of that input

What is the average fixed cost?

the fixed cost per unit of output

the diminishing returns effect

the larger the output, the greater the amount of variable input required to produce additional units, leading to higher average variable cost.

the spreading effect

the larger the output, the greater the quantity of output over which fixed cost is spread, leading to higher average variable cost

What is the minimum-cost output?

the quantity of output at which average total cost is lowest- the bottom of the U-shaped curve

what is a production function?

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

What is total cost of producing a given quantity of output?

the sum of the fixed cost and the variable cost of producing that quantity of output.

What is the average total cost?

the total cost divided by quantity of output produced

What is the average variable cost?

the variable cost per unit of output