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