Econ Chapter 11

three concepts describe the relationship between output and the quantity of labor employed (input):

(1) total product (TP) (2) marginal product (MP) (3) average product (AP)

example: quantity increases from 1000 to 1800 and total cost increases from 3000 to 5000

(5000-3000)/(1800-1000)= 2000/800= 2.5

what does the total product curve separate

*attainable output* levels from *unattainable output* levels in the short run

-the firm has 4 different plants -each plant has a ________________ ATC curve -the firm can compare the ATC for each output at different _______________

-1,2,3, or 4 knitting machines -short run -plants

for farmer jack the fixed cost is....

-1000 for his land

why is AVC U-shaped

-MP exceeds AP, which brings rising AP and falling AVC -eventually, MP falls below AP, which brings falling AP and rising AVC

how is the ATC curve, AVC curve, and MC curve shaped?

-U-shaped

technology -a technological change that increases productivity will shift the product curve __________ and the cost curves _______________

-a technological change that increases productivity will shift the product curve *upward* and the cost curves *downward*

long run cost -in the long run ________ inputs (factors) are variable and __________ costs are variable

-all, all

prices of factors of production -an increase in the price of a factor of production increases ____________ and _____________________.

-an increase in the price of a factor of production increases *costs* and *shifts the cost curves in the short run*

diminishing marginal returns

-arises because each additional worker has less access to capital and less space in which to work -are so pervasive that they are elevated to the status of a "law" -states that as a firm uses more of a variable input with a given quantity of fixed inputs, the marginal product of the variable input *eventually diminishes*

long run average total cost -LRATC is the relationship between the lowest attainable ________________ and output when the firm can change both the___________ it uses and ___________________

-average total cost, plant, the quantity of labor it employs

the MC curve intersects the ______________ and the _______________ at their minimum points

-average variable cost curve (AVC) and the average total cost curve (ATC)

examples of fixed factors in the short run

-capital, land, and entrepreneurship

diseconomies of scale are due to

-coordination problems in large organizations -when management becomes stretched

a firms production function exhibits

-diminishing marginal returns to labor (for a given plant) -diminishing marginal returns to capital (for a fixed quantity of labor) -for each *plant*, diminishing marginal product of labor creates a set of short run, U shaped cost curves for MC, AVC, and ATC

-economies of scale are features of a firm's technology that lead to ____________ long-run average cost (LRAC) as output increases -diseconomies of scale are features of a firm's technology that lead to ____________ long-run average cost (LRAC) as output increases

-falling -rising

examples of long-run cost

-firms can build more factories, or sell the existing ones -the behavior of long-run cost still depends on the firm's production function -all costs are changeable and can be renegotiated -firms have more control over costs and can adjust the size of production process (scale of production)

constant returns of scale -LRATC stays the same as quantity _______________

-increases

diseconomies of scale -LRATC rises as quantity ____________

-increases

economies of scale -LRATC falls as quantity ____________

-increases

the MC curve -over the output range with *increasing marginal returns,* marginal cost falls as output ____________ -over the output range with *diminishing marginal returns,* marginal cost rises as output _____________

-increases -increases

economies of scale occur when

-increasing production allows greater specialization -workers produce more efficiently when focusing on a specialized task

economies of scale is also called

-increasing returns of scale

examples of variable factors in the short run

-labor, raw materials, and energy

the firm can change to a different factory scales in the ___________, but not in the ______________

-long run, short run

-the long run average cost curve is made up from the ____________ ATC for each output level

-lowest

-the LRAC curve is a _____________ that tells the firm the plant that minimizes the cost of producing a given output

-planning curve

long run average total cost -the LRATC is a _______________. -it tells the firm the _________ and the ___________________ to use at each output level to minimize ______________

-planning curve -plant, quantity of labor, total cost

short run cost and long run cost -the average cost of producing a given output varies and depends on the firm's ___________ -the larger the plant, the _____________ is the output at which ATC is at a minimum

-plant -greater

-once the firm has chosen its ____________, the firm incurs the costs that correspond to the ATC curve for that plant

-plant (scale)

total cost curve

-relationship between output quantity and total cost

-the long run average cost curve is the

-relationship between the lowest attainable average total cost and output when both the plant and labor are varied

a firm can choose from 3 factory scales

-small, medium and large

Decision Time Frames

-some decisions are critical to the survival of the firm -some decisions are irreversible (or very costly to reverse) -other decisions are easily reversed and are less critical to the survival of the firm, but still can influence profit

the position of a firm's *short run cost curves* depends on two factors

-technology -prices of factors of production

the shapes of a firm's *cost curves* are determined by the _______________ it uses, thus are linked to shapes of _______________ _______________.

-technology, product curves

fixed cost

-the cost of the firm's fixed inputs -do not change with the quantity of output

variable cost

-the cost of the firm's variable inputs -do change with the quantity of output

all decisions can be placed in two time frames

-the short run -the long run

an increase in *variable cost* shifts the total cost (TC), average total cost (ATC), average variable cost (AVC), and marginal cost (MC) curves ______________, but does NOT shift ______________, ______________.

-upward, fixed cost (FC), and average fixed cost (AFC) curves

an increase in a *fixed cost* shifts the total cost (TC), average total cost (ATC), and average fixed cost (AFC) curves _______________, but does NOT shift the ______________, _______________, ___________________.

-upward, marginal cost (MC) curve, variable cost (VC), and average variable cost (AVC)

for farmer jack, VC equals...

-wages he pays to workers (2000 per worker) -the more whet he needs to produce, the more workers he needs to hire, the higher variable cost

why is ATC U-shaped

1. spreading fixed cost over a larger output- AFC curve slopes downward as output increases 2. eventually diminishing returns- the AVC curve slopes upward and AVC increases more quickly than AFC is decreasing -in addition, the ATC falls at low output levels because AFC is falling quickly

TRUE OR FALSE long- run factors cannot be easily reversed

TRUE

TRUE OR FALSE short-run decisions can be easily reversed

TRUE

the short run definition

a time frame in which the quantity of one or more resources used in production is *fixed*

increasing marginal returns

arise from increased specialization and division of labor

when marginal product *is below* average product...

average product decreases

when marginal product *exceeds* average product...

average product increases

when marginal product *equals* average product...

average product is at its maximum

a firm experiences economies of scale up to some output level. beyond that output level, it moves into ______________

constant returns to scale or diseconomies of scale

diseconomies of scale is also called

decreasing returns of sale

average product labor

equal to the *total product* divided by *the quantity of labor* employed

when AP is rising, AVC is _____________

falling

when MP is rising, MC is ______________

falling

to increase output in the long run...

firm can change its plant as well as other factors

average fixed cost (AFC) equation

fixed cost/quantity of output

total product curve

how total product changes with the quantity of labor employed

these three curves decrease first, then begin to _______________

increase

the AFC curve always decreases as output _________________

increases

firms can decide to change its plant (fixed factors) in the ______________ ___________

long run

Farmer jack's cost -when farmer jack hires more workers, his output rises by.... -if jack pays *1000 for land* the wage for one farm work is ....

marginal product -2000

the height of each bar (on the graph) measures the _______________.

marginal product of labor

AVC is at its maximum at the same output level at which AP is at its ___________________

maximum

MC is at its minimum at the same output level at which MP is at its ________________

maximum

if the LRAC curve is U-shaped, the minimum point identifies the ______________

minimum efficient scale output level

total cost increases as ______________ increases

output

variable increases as ______________ increases

output

fixed cost is the same at each ____________ ___________

output level

the firm makes many decisions to achieve its main objective ___________ _____________.

profit maximization

firms can decide to change its variable factors, such as labor, in the _____________ ___________

short run

each scale has its own ________________

short run ATC curve

marginal product of labor definition

the *change in total output* that results from a one-unit in the quantity of labor employed, with all other inputs remaining the same

total product definition

the *total output* produced in a given period

to increase the output in the short run, a firm must increase ________________.

the amount of labor employed

total cost

the cost of *all* resources used

average total cost definition -equation

the cost of a typical unit of output produced. the mean value of the total cost -equation: total cost/quantity of output

to increase output in short run....

the firm must increase the quantity of variable factors

we call the fixed factors _____________ -in the short run, it is

the firm's plant -in the short run, the firm's plant is fixed

diminishing marginal product of capital definition

the increase in output resulting from a one-unit increase in the amount of capital employed holding constant the amount of labor employed

marginal cost (MC) -equation

the increase in total cost that results from a one unit increase in total product -equation: MC= TC/Q

law of diminishing returns

the property whereby the marginal product of an input declines as the quantity of that input increases -EX: as jack hired more and more workers, each additional worker has less land, has to share equipment, and will be less productive with the crowded working conditions -marginal product declines eventually -the production function becomes flatter as number of workers increases

scale

the size of the production process -if the business is expected to grow, firm can ramp up production -if the business is faltering, firm can scale back its operation -a *long-run time horizon* allows a business to choose a scale of operation that best suits its needs --however long it would take to vary all costs

minimum efficient scale is

the smallest quantity of output at which the long-run average cost reaches its lowest level

the long run definition

the time frame in which the quantities of *all* factors-including the plant size-can be *varied*

equation of total cost

total cost= fixed cost + variable cost

as the quantity of labor employed increases....

total product (TR or Total output): increases marginal product (MP): increases initially... but eventually decreases

average variable cost (AVC)

variable cost/quantity of output