Section 10, Module 54 (Microeconomics)

fixed input

An input whose quantity is fixed for a period of time and cannot be varied. These are inputs whose quantity is constant for some period of time (regardless of how much output is produced). Typically, fixed inputs will include land and machinery, though they can also include certain types of labor (due to contracts).

variable input

An input whose quantity the firm can vary at any time. Examples of variable inputs often include labor, energy, fuel, etc.

Marginal Product of Labor

Change in quantity of output produced by one additional unit of labor. Change of quantity of output/change in quantity of labor MPL = ΔQ/ΔL

When firms make short-run decisions, there is nothing they can do about their ______ inputs; i.e., they are stuck with whatever quantity they have. However, they can make choices about their _______ inputs.

Fixed inputs However they can make choices about their variable inputs.

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.

Marginal product

The marginal product of an input is the additional quantity of output produced by using one more unit of that input.

production function

The relationship between the quantity of inputs a firm uses and the quantity of output it produces. Relates physical output of a production process to physical inputs or factors of production. Describes the relationship between the quantity of inputs and the quantity of outputs that the firm produces.

Long run

The time period in which all inputs can be varied. A long period of time has elapsed where firms can adjust the quantity of any input. Involves a time horizon long enough for a firm to vary all of its inputs Ex: To guide the firm over the next several years, manager must use the long-run view

Short run

The time period in which at least one input is fixed. Involves any time horizon over which at least one of the firm's inputs cannot be varied Ex: Determining what a firm should do next week, the short run view is the best.

Diminishing Returns to an Input

There are diminishing returns to an input 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.

Bernie's ice-making company produces ice cubes using a 10-ton machine and electricity (along with water, which we will ignore as an input for simplicity). The quantity of output, measured in pounds of ice, is given in the accompanying table. Quantity of electricity (kw) Quantity of ice (lbs) 0 0 1 1,000 2 1,800 3 2,400 4 2,800 a. What is the fixed input? What is the variable input? b. Construct a table showing the marginal product of the variable input. Does it show diminishing returns? c. Suppose a 50% increase in the size of the fixed input increases output by 100% for any given amount of the variable input. What is the fixed input now? Construct a table showing the quantity of output and the marginal product in this case.

a. The fixed input: 10-ton machine The variable input: electricity b. http://i.imgur.com/OcabtiM.png As you can see from the declining numbers in the third column of the accompanying table, electricity does indeed exhibit diminishing returns: the marginal product of each additional kilowatt of electricity is less than that of the previous kilowatt. c. A 50% increase in the size of the fixed input means that Bernie now has a 15-ton machine, so the fixed input is now the 15-ton machine. Since it generates a 100% increase in output for any given amount of electricity, the quantity of output and the marginal product are now as shown in the accompanying table. http://i.imgur.com/Eo22iZ2.png

Historically, the limits imposed by diminishing returns have been alleviated by a. investment in capital b. increases in the population c. discovery of more land d. Thomas Malthus e. economic models

a. investment in capital

Diminishing returns to an input ensures that as a firm continues to produce, the total product curve will have what kind of slope? a. negative decreasing b. positive decreasing c. negative increasing d. positive increasing e. positive contstant

b. positive decreasing

A production function shows the relationship between inputs and _________? a. fixed costs b. variable costs c. total revenue d. output e. profit

d. output

Which of the following defines a short run? a. less than a year b. when all inputs are fixed c. when no inputs are variable d. when only one input is variable e. when at least one input is fixed

e. when at least one input is fixed