Econ 102: Technology, Production, and Costs
Firms may experience economies of scale for a number of what reasons?
-The firm's technology may make it possible to increase production with a smaller proportional increase in at least one input. -Both workers and managers can become more specialized, enabling them to become more productive, as output expands. -Large firms, like Ford, Walmart, or Apple, may be able to purchase inputs at lower costs than smaller competitors. -As a firm expands, it may be able to borrow money at a lower interest rate, thereby lowering its costs.
Why are the marginal and average cost curves U shaped?
-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. -We can conclude that the marginal cost of output falls and then rises—forming a U shape—because the marginal product of labor rises and then falls. -As long as marginal cost is below average total cost, average total cost falls. When marginal cost is above average total cost, average total cost rises. Marginal cost equals average total cost when average total cost is at its lowest point.
What are explicit costs?
A cost that involves spending money.
What is the long-run average cost curve?
A curve that shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed.
What are implicit costs?
A nonmonetary opportunity cost.
What is average total cost?
Average fixed cost plus average variable cost.
The difference between what Jill paid for her capital at the beginning of the year and what she would receive if she sold the capital at the end of the year.
Economic Depreciation
Costs that remain constant as output changes. -Typically includes lease payments for factory or retail space, payments for fire insurance, and payments for online and television advertising.
Fixed Cost
What is the average fixed cost?
Fixed cost divided by the quantity of output produced.
What happens in the long run?
In the long run, total cost equals variable cost, and average total cost equals average variable cost.
The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs. -Because a firm's technology is the processes it uses to turn inputs into output, this term represents the firm's technology.
Production Function
What is the marginal product of labor?
The additional output a firm produces as a result of hiring one more worker. -In the short run, the quantity of pizza ovens Jill leases is fixed, so as she hires more workers, the marginal product of labor eventually begins to decline. At some point, Jill uses up the gains from the division of labor and from specialization and starts to experience the effects of the law of diminishing returns. -Change in output/change in labor
What is marginal cost?
The change in a firm's total cost from producing one more unit of a good or service. -We can calculate marginal cost for a particular increase in output by dividing the change in total cost by the change in output.
What is the long run?
The firm is able to vary all its inputs and can adopt new technology and increase or decrease the size of its physical plant. -In the long run, all costs are variable; there are no fixed costs in the long run
What are economies of scale?
The firm's long-run average cost falls as it increases the quantity of output it produces.
What is minimum efficiency scale?
The level of output at which all economies of scale are exhausted.
What is the average product of labor?
The total output produced by a firm divided by the quantity of workers. -If Jill hires 4 workers to produce 600 pizzas, the average product of labor is 600/4 = 150. -The average product of labor is the average of the marginal products of labor. -Whenever the marginal product of labor is greater than the average product of labor, the average product of labor must be increasing. -Whenever 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 at the quantity of workers for which the average product of labor is at its maximum.
The cost of all the inputs a firm uses in production. -TC=FC+VC
Total Cost
What is the average total cost?
Total cost divided by the quantity of output produced.
The costs that change as output changes. -A typically includes its labor costs, raw material costs, and costs of electricity and other utilities.
Variable Cost
What is average variable cost?
Variable cost divided by the quantity of output produced.
What is a positive technological change?
Whenever a firm experiences positive technological change, it is able to produce more output using the same inputs or the same output using fewer inputs.
What is the short run?
The period of time during which at least one of a firm's inputs is fixed. -The firm's technology and the size of its physical plant—its factory, store, or office—are both fixed, while some other inputs, including the number of workers the firm hires, are variable.
What is tecnology?
The processes it uses to turn inputs into outputs of goods and services. -The basic activity of a firm is to use inputs, such as workers, machines, and natural resources, to produce outputs of goods and services. -A firm's technology depends on many factors, such as the skills of its managers, the training of its workers, and the speed and efficiency of its machinery and equipment.
What are accounting costs?
The rules of accounting generally require that only explicit costs be used for purposes of keeping the company's financial records and for paying taxes. Therefore, explicit costs are sometimes called accounting costs. -Economic costs include both accounting costs and implicit costs.
What are diseconomies of scale?
The situation in which a firm's long-run average cost rises as the firm increases output.
What are constant returns to scale?
The situation in which a firm's long-run average costs remain unchanged as it increases output.