Costs of Production
What factors promote diseconomies of scale?
- Inefficiencies - Worker Alienation - Shirking Behavior
What factors promote economies of scale?
- Labor Specialization - Managerial Specialization (one person managing more people for same cost) - Efficient Capital
If market demand was 10 million and MES was 100,000, how many firms can the market support?
100 firms
Diminishing Marginal Returns
As input is increased, marginal product declines
Fixed Costs
Costs that do not vary with the quantity of output produced
Variable Costs
Costs that vary with the quantity of output produced
Economies of Scale
Decreasing long-run average total costs as output increases
What is the typical shape for an AFC curve?
Downward-sloping, flattens at end
Why are firms in industries with diseconomies of scale at relatively low outputs not typically large?
Firms with large outputs (beyond MES) can easily by underpriced by smaller, lower-cost firms
What is a good analogy for remembering how MC and ATC are related?
GPA (ATC) & Grade in Class (MC)
Diseconomies of Scale
Increasing long-run average total costs as output increases
What are the two main inputs for production?
Labor & Capital
Constant Returns to Scale
Long-run average total costs remain unchanged as output increases
How do you find the profit maximization point on a table?
Look for the highest amount of input that keeps marginal revenue product above marginal costs
Minimum Efficient Scale (MES)
Lowest output at which minimum average costs can be achieved
Formula for Marginal Revenue Product
Marginal Product of Labor * Price
How can a business decide how many firms a market can support?
Market Demand / Minimum Efficient Scale
What do economies of scope explain in business?
Mergers & Acquisitions
What does the intersection of the MC and ATC curves represent?
Minimum ATC
What symbol denotes marginal profit?
Mπ
What industry exhibits extensive economies of scale with limitless price reductions as output increases?
Natural Monopoly
Production Function Equation
Q = f(K,L)
Formula for Cost Effect of Economies of Scope
SC = (sum of costs of producing goods separately) - cost of producing goods jointly / (sum of costs of producing goods separately)
Formula for Average Total Cost
TC/Q
Formula for Average Fixed Cost
TFC/Q
Formula for Average Variable Cost
TVC/Q
Total Costs
The sum of fixed and variable costs
If the long-run average total costs continuously decline, what is the minimum efficient scale?
There is none
Accounting Profit
Total revenue - explicit costs
Economic Profit
Total revenue - explicit costs - implicit costs
True or False: In the long run, there are no fixed costs
True
True or False: In the short run, at least one of a firm's inputs is fixed
True
True or False: The cost function is the inverse of the production function
True
What is the typical shape for an ATC curve?
U (higher than AVC)
What is the typical shape for an AVC curve?
U (lower than ATC)
What is the typical shape for a MC curve?
Upward-sloping
Diseconomies of Scope
When the cost of producing two products together is higher than the cost of producing them separately
Learning Curve
When you produce more, you learn from the experience so that you produce at a lower cost in the future
Economies of Scope
savings that come from producing two (or more) outputs at less cost than producing each output individually
Marginal Product of Labor
the change in output from employing one additional unit of labor
Marginal Cost of Labor
the cost to the firm of hiring one more worker
Formula for Marginal Product of Labor
ΔQ / ΔL
Formula for Marginal Cost
ΔTC / ΔQ
