Economics Chapter 7
does not exist because there are no fixed cost in the long run
AFC in the long run
MC<ATC
ATC decreases when_____
MC>ATC
ATC increases when ____
it is below MC
ATC is always positively sloped when
U-shaped AVC
AVC decreases at first, hits a minimum, and then rises as output increases (as a result of diminishing returns).
law of diminishing returns
Added output begins to decrease and ultimately goes negative as more and more workers are added with no increase in capital.
marginal cost
As MPP diminishes, it takes more variable input to make a product, so ______ rise.
marginal cost increases
As _____ , it intersects ATC at its minimum point.
variable cost
At zero output, these costs are zero. As output increases, ______ increase rapidly at first, then more slowly, and finally very fast as the firm approaches maximum capacity.
It declines at first, hits a minimum, then rises sharply.
Describe the graphical portrayal of the marginal cost curve:
lowest
Each short-run ATC curve point that touches the long-run ATC curve, also known as the planning curve, shows the _____ unit cost attainable for different output levels when the firm has had time to make all desired changes to its plant size.
minimum average costs
However, this amount of output is not necessarily the output where profit is maximized.
diseconomies of scale must exist
If a firm doubles the size of all of its inputs and the output does not double, then
diseconomies of scale
If the plant size gets too big, however, long-run average costs begin to rise, creating
MPP equals zero
If wages in an economy are zero, then a firm should hire workers until
constant returns
In production, _______ __________ to scale occur between economies and diseconomies of scale, where long-run average costs do not change as output continues to increase.
lowest average total cost
It is at this point where the long-run marginal cost curve intersects the long-run average total cost curve.
lower
Long run: As plant size gets larger, each plant's ATC curve has a _____ minimum point. In this case, building a larger plant would _____ production costs.
fixed costs
Must be paid even if output is zero. Do not increase as output increases.
Operating efficiency may be reduced. Worker alienation may increase. Rigid corporate structures emerge. Off-site management may be unresponsive.
Result of diseconomies of scale:
Larger plants reduce minimum average costs. Greater efficiency (will decrease cost) may come from Specialization vs. multi-function workers. Mass production vs. small batch mode production.
Result of economies of scale:
short run
The ______ is characterized by fixed costs.
Marginal cost in the short run
The law of diminishing returns affects
no input is fixed in quantity
The long run is best defined as the period when
economies, diseconomies
The long-run, U-shaped average total cost curve derives its shape from _______ of scale, then _____ of larger production
marginal physical product
The measure of added output as labor increases is
minimal
The output at which ATC switches from being dominated by AFC to being dominated by rising AVC is the point where average costs are ______
the lowest average total cost at which any chosen output level can be produced after the firm has had time to make adjustments in plant size.
What does the long-run average total-cost curve show?
average fixed cost at a specific level of output
What does the vertical distance between the average total cost and average variable cost curves measure?
accountants
Who factors in explicit cost?
economists
Who factors in implicit cost?
economic, opportunity
____ costs are payments made by firms to attract the resources they need away from alternate production opportunities.
marginal physical product
_____________ goes up at low levels of output but peaks and then diminishes throughout other levels of production.
marginal physical product
_____________ is zero when total output is at its maximum.
explicit costs
a payment made for the use of a resource.
long run
a period of time long enough for all inputs to be varied. There are no fixed costs in the _____. All costs are variable.
Falling AFC
as output increases, AFC _____ rapidly.
U-shaped ATC
at low output, falling AFC dominates and ATC decreases. As output increases, rising AVC begins to dominate. ATC hits a minimum, then begins to rise.
marginal cost
change in total cost/ change in output
fixed cost
costs of production that don't change when the rate of output is altered.
variable cost
costs of production that don't change when the rate of output is altered.
Economic cost
explicit cost + implicit cost
are used in production but are not paid for monetarily
implicit costs are those that:
economies of scale
reductions in minimum average costs that come through increases in the size (scale) of plants and equipment.
production function
shows the maximum quantity of a good attainable from different combinations of factor inputs.
marginal cost
the increase in total cost associated with a one-unit increase in production.
minimum
the long-run average total cost curve is derived from the _____ points of tangency of each of the short-run ATC curves.
diminishing
the marginal cost curve's shape is a consequence of the law of ______ returns.
law of diminishing returns
the marginal physical product of a variable input declines as more of it is employed with a given quantity of other (fixed) inputs.
total cost
the market value of all resources used to produce a good or service.
implicit cost
the value of resources used in production, even when no direct payment is made.
ATC
total cost divided by the quantity of output in a given time period.
AFC
total fixed cost divided by the quantity of output in a given time period.
AVC
total variable cost divided by the quantity of output in a given time period.
