ECON CH. 11

Constant returns to scale

the situation when a firm's long-run average costs remain unchanged as it increases output

Expansion path

A curve that shows a firm's cost-minimizing combination of inputs for every level of output.

average total cost

total cost divided by the quantity of output produced. The average total cost curve often has a U shape.

Average variable cost

total variable cost divided by the quantity of output produce

Average fixed cost

FC/ output

explicit cost

is a cost that involves spending money

Diseconomies of scale

is the situation when a firm's long-run average costs rise as it increases output.

MC, ATC, AVC curves

All u-shaped. The MC curve intersects the AVC and ATC curves at their minimum points. When MC is below AVC or ATC, it causes them to decrease, and when MC is above AVC or ATC, it causes them to increase. As output increases, the difference between ATC and AVC (this is equal to AFC) gets smaller because AFC gets smaller and smaller as output increases.

law of diminishing returns.

At some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline

Graph average total cost, average variable cost, average fixed cost, and marginal cost

Average fixed cost is equal to total fixed cost divided by the level of output. Average variable cost is equal to total variable cost divided by the level of output

Distinguish between the economic short run and the economic long run

In the short run, a firm's technology and the size of its factory, store, or office are fixed. In the long run, a firm is able to adopt new technology and to increase or decrease the size of its physical plant. Total cost is the cost of all the inputs a firm uses in production. Variable costs are costs that change as output changes. Fixed costs are costs that remain constant as output changes. Opportunity cost is the highest-valued alternative that must be given up to engage in an activity. An explicit cost is a cost that involves spending money. An implicit cost is a nonmonetary opportunity cost. The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs is called the firm's production function.

Average Total cost

TC/ output

Define technology and give examples of technological change

The basic activity of a firm is to use inputs, such as workers, machines, and natural resources, to produce goods and services. The firm's technology is the processes it uses to turn inputs into goods and services. Technological change refers to a change in the ability of a firm to produce a given level of output with a given quantity of inputs

Understand how firms use the long-run average cost curve in their planning.

The long-run average cost curve shows the lowest cost at which a firm is able to produce a given level of output in the long run. For many firms, the long-run average cost curve falls as output expands because of economies of scale. Minimum efficient scale is the level of output at which all economies of scale have been exhausted. After economies of scale have been exhausted, firms experience constant returns to scale, where their long-run average cost curve is flat. At high levels of output, the long-run average cost curve turns up as the firm experiences diseconomies of scale.

Explain and illustrate the relationship between marginal cost and average total cost

The marginal cost of production is the increase in total cost resulting from producing another unit of output. The marginal cost curve has a U shape because when the marginal product of labor is rising, the marginal cost of output is falling. When the marginal product of labor is falling, the marginal cost of output is rising. When marginal cost is less than average total cost, average total cost falls. When marginal cost is greater than average total cost, average total cost rises.

Understand the relationship between the marginal product of labor and the average product of labor

The marginal product of labor is the additional output produced by a firm as a result of hiring one more worker. average product of labor is the total amount of output produced by a firm divided by the quantity of workers hired

Distinguish between the economic short run and the economic long run.

Total Cost (TC ) = Fixed Cost (FC ) + Variable Cost ( VC) Total cost is the cost of all the inputs a firm uses in production. Variable costs are costs that change as output changes. Fixed costs are costs that remain constant as output changes.

marginal product of labor

additional output a firm produces as a result of hiring one more worker.

slope of isocost line

constant and equals the change in the quantity of one input (capital) divided by the change in the quantity of the other input (labor). The slope of an isocost line is equal to the ratio of the price of the input on the horizontal axis divided by the price of the input on the vertical axis, multiplied by -1. A change in the price of an input causes the slope to change, which is a rotation of the isocost line. Higher levels of total cost shift the isocost line outward, and lower levels of cost shift the isocost line inward.

Isoquants

curve showing all the combinations of two inputs, such as capital and labor, that will produce the same level of output. The farther an isoquant is from the origin—the farther to the right on the graph—the more output the firm is producing

cost-minimizing choice of inputs

determined jointly by available production technology and input prices. A change in technology affects the position of isoquants and may affect the choice of inputs. If input prices change, then the position of isocost lines will change and the choice of inputs may also change.

Minimum efficient scale

is the level of output at which all economies of scale have been exhausted

Economies of scale

is the situation when a firm's long-run average total costs fall as it increases output

implicit cost

nonmonetary opportunity cost

marginal rate of technical substitution (MRTS)

rate at which a firm is able to substitute one input for another while keeping the level of output constant. The slope of an isoquant becomes less steep as one moves downward along the isoquant. This is a consequence of diminishing returns

isocost line.

shows all the combinations of two inputs, such as capital and labor, that have the same total cost. An isocost line intersects the vertical axis at the maximum amount of an input (for example, capital) that can be purchased with a given budget, or total cost. The same isocost line intersects the horizontal axis at the maximum amount of another input (for example, labor) that can be purchased with the same budget.

long-run average cost curve

shows the lowest cost at which the firm is able to produce a given quantity of output in the long run, when no inputs are fixed

Marginal cost

the change in a firm's total cost from producing one more unit of a good or service. The U shape of the average total cost curve is determined by the shape of the marginal cost curve. MC= change in TC/ change in Q (output)

Moving along an isoquant,

the output is constant while the amounts of two inputs change. The marginal product of capital (MPK) equals the change in output from using an additional unit of capital. The marginal product of labor (MPL) equals the change in output from using an additional unit of labor.

average product of labor

the total output produced by a firm divided by the quantity of workers. When the marginal product of labor is greater than the average product of labor, the average product of labor must be increasing. When the marginal product of labor is less than the average product of labor, the average product of labor must be decreasing. The marginal product of labor equals the average product of labor for the quantity of workers where the average product of labor is at a maximum.