Chapter 11
What is the biggest decision that an entrepreneur makes?
In what industry to establish a firm
How do firms increase output in the short run?
Increase the quantity of a variable factor of production, usually labor.
What are the two features that determine the shapes of product curves for almost every production process?
- Increasing marginal returns initially - Diminishing marginal returns eventually
How does the minimum efficient scale play a role in determining market structure?
-In a market in which the minimum efficient scale is small relative to market demand, the market is competitive. -In a market in which the minimum efficient scale is large relative to market demand, the market is either an oligopoly or a monopoly.
What shifts a firm's short-run cost curves?
-Technology -Prices of factors of production
Why is the average total cost curve U-shaped?
Because of the influence of two opposing forces: -Spreading total fixed cost over a larger output -Eventually diminishing returns
How does a firm increase output in the long run?
A firm can change its plant as well as the quantity of labor it hires.
How does technology shift short-run cost curves?
A technological change that increases productivity increases the marginal product and average product of labor. With a better technology, the same factors of production can produce more output, so the technological advance lowers the cost of production and shifts the cost curves downward.
What is the long run?
A time frame in which the quantities of all factors of production can be varied; a period in which the firm can change its plant.
Why do prices of factors of production shift short-run cost curves?
An increase in the price of a factor of production increases the firm's costs and shifts its cost curves. How the curves shift depends on which factor price changes.
What is 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.
Where does the marginal cost curve intersect the average variable cost curve and the average total cost curve.
At their minimum points.
What is the main source of economies of scale?
Greater specialization of labor and capital.
What do product curves show?
How total product, marginal product, and average product changes as employment changes, as well as the relationship between the three concepts.
What are constant returns to scale?
Features of a firm's technology that keep average total cost constant as output increases. When constant returns to scale are present, the long-run average cost curve is horizontal.
What are economies of scale?
Features of a firm's technology that makes average total cost fall as output increases. When economies of scale are present, the long-run average cost curve slopes downward.
What are diseconomies of scale?
Features of a firm's technology that makes average total cost rise as output increases. When diseconomies of scale are present, the long-run average cost curve slopes upward.
How does an increase in a fixed cost shift short-run cost curves?
It shifts the TFC, AFC & TC curves upward and leaves the AVC, TVC and MC curves unchanged.
How does an increase in a variable cost shift short-run cost curves?
It shifts the TVC, AVC and MC curves upward but leaves AFC and TFC curves unchanged.
What is the main source of diseconomies of scale?
The challenge of maintaining a large enterprise.
What is the marginal product of capital?
The change in total product divided by the change in capital when the quantity of labor is constant.
What is total cost?
The cost of all the factors of production it uses.
What is total fixed cost?
The cost of all the firm's fixed factors. The quantities of fixed factors don't change as output changes, so total fixed cost is the same at all outputs.
What is total variable cost?
The cost of the firm's variable factors. Total variable cost changes as output changes.
Why are short-run decisions easily reversed?
The firm can increase or decrease its output in the short run by increasing or decreasing the amount of labor it hires.
What does the behavior of long-run cost depend on?
The firm's production function.
What is a firm's plant?
The fixed factors of production
How do we calculate a firm's marginal cost?
The increase in total cost divided by the increase in output.
What is a firm's marginal cost?
The increase in total cost that results from a one-unit increase in total cost that results from a one unit increase in output.
What is 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.
What is total product?
The maximum output that a given quantity of labor can produce.
What is sunk cost?
The past expenditure on a plant that has no resale value. It is irrelevant to the firm's current decisions.
What is the long-run average cost curve?
The relationship between the lowest attainable average total cost and output when the firm can change both the plant it uses and the quantity it employs.
What is a production function?
The relationship between the maximum output attainable and the quantities of both labor and capital.
What is minimum efficient scale?
The smallest output at which long-run average cost reaches its lowest level.
What do decisions about the quantity to produce and the price to charge depend on?
The type of market in which the firm operates
How is the total product curve similar to the production possibilities frontier?
They both separate the attainable output levels from those that are unattainable.
What is average total cost?
Total cost per unit of output.
What is average fixed cost?
Total fixed cost per unit of output.
What is average product?
Total product divided by the quantity of labor employed.
What is average variable cost?
Total variable cost per unit of output.
When do increasing marginal returns occur?
When the marginal product of an additional worker exceeds the marginal product of the previous worker.
When do diminishing marginal returns occur?
When the marginal product of an additional worker is less than the marginal product of the previous worker.
Why do diminishing marginal returns arise?
Workers are using the same capital and working in the same space. As more workers are added, there is less and less for the additional workers to do that is productive.