AP Econ- Cost Curves - Assignment Essays

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Production function

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Relationship between quantity of inputs a firm uses and quantity of output it produces

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Fixed input

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input whose quantity is fixed for a period of time and cannot be varied (space, tables)

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Variable input

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an input whose quantity the firm can vary at any time (ingredients, workers)

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Long run

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the time period in which all inputs can be varied

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Short run

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the period of time during which at least one of a firm's inputs is fixed

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Total product curve

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shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input
Increases at increasing rate then increases at decreasing rate- MP increases then decreases

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Marginal product of input curve

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Shows how additional quantity of output changes by using one more unit of input
Increases then decreases- slope of total product curve

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Marginal product equation

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MP = change in quantity of output/change in quantity of input

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Diminishing returns to labor

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Increase in quantity of input leads to decline in MP when other levels of input are fixed, leads to negative slope of MP eventually

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What happens to TP and MP curves if there are higher quantities of other inputs

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Shift upwards

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Three stages of MP curve

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Increasing returns (positive slope), diminishing returns (flattening slope), negative returns (negative slope)

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Fixed cost

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Cost that doesn't change no matter how much good is produced, cost of fixed inputs, cost at output 0 (insurance, salaries, equipment)

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Variable cost

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Cost that depends on quantity of output produced, cost of variable input (ingredients)

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Total cost

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TC = FC + VC
Calculate by finding areas of rectangles on graph

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Total cost curve

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Shows how total cost depends on quantity of output
Increases as decreasing rate then increases at increasing rate bc of diminishing returns to input- marginal cost decreases then increases

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Variable cost curve

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Starts at origin and increases at decreasing rate then increases at increasing rate

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Fixed cost curve

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straight horizontal line

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Marginal cost curve

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Shows how total cost changes by producing one more output
Decreases then increases bc of diminishing returns to input- slope of total cost curve

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Marginal cost equation

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MC = change in TC / change in Q output

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Average total cost

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ATC = TC/Q
ATC = AVC + AFC
U-shaped- decreases then increases
Minimum intersects MC

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Average fixed cost

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Cost per unit of output, always falls
AFC = FC/Q

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Average variable cost

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Variable cost per unit of output, decreases then increases and gets closer to ATC curve
Minimum intersects MC
AVC = VC/Q

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What is the space between ATC and AVC

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AFC- gets closer and closer to x axis

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Spreading effect

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The larger the output, the greater the quantity output over which the fixed cost is spread, leading to lower AFC
More powerful at lower costs- small increases in output cause large reductions in AFC (steeper slope at lower outputs)

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Diminishing returns effect

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The larger the output, the greater the amount of variable input required to produce additional units, leading to higher AVC
More powerful at higher costs- AFC is small so diminishing returns increase as output rises (AVC steepens at higher outputs)

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Minimum-cost output

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Quantity of output at which average total cost is lowest, bottom of ATC curve
MC intersects ATC at minimum

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Principles of firm's MC & ATC curves

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ATC = MC at minimum-cost output
ATC > MC at outputs less than minimum
ATC < MC at outputs greater than minimum

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Why does MC curve decrease then increase

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Specialization- increasing returns as workers specialize and new inputs are used, costs are lower
Diminishing returns to labor- benefits are exhausted after a certain output, leading to decrease in productivity and higher costs

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ATC of low fixed cost in short run

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Lower at outputs lower than average output and higher at outputs higher than average output- increase in fixed cost outweighs reduction in variable cost from greater production only at low inputs

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ATC of high fixed cost in short run

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Higher at outputs less than average and lower at outputs greater than average- reduction of variable costs outweigh increase in fixed costs only at high inputs

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Long run average total cost curve

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Shows relationship between output and ATC when fixed cost has been chosen to minimize ATC for each level of output
U-shaped- decreases then increases

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Scale

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Size of firm's operations

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Economies of scale

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factors that cause a producer's LRATC to fall as output rises
Occurs at low outputs

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Increasing returns to scale

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when output increases more than in proportion to an increase in all inputs, when LRATC declines, economies of scale

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Diseconomies of scale

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When LRATC increases as output increases

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Decreasing returns to scale

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when output increases less than in proportion to an increase in all inputs, LRATC is increasing, diseconomies of scale

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Constant returns to scale

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when output increases directly in proportion to an increase in all inputs, LRATC is constant

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Reasons for economies of scale

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Specialization
Very large initial setup cost
Network externalities

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Reasons for diseconomies of scale

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Poor communication and coordination

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Sunk cost

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Cost that has already been incurred and is nonrecoverable, should be ignored in a decision about future actions

1 of 40

question

Production function

answer

Relationship between quantity of inputs a firm uses and quantity of output it produces

question

Fixed input

answer

input whose quantity is fixed for a period of time and cannot be varied (space, tables)

question

Variable input

answer

an input whose quantity the firm can vary at any time (ingredients, workers)

question

Long run

answer

the time period in which all inputs can be varied

question

Short run

answer

the period of time during which at least one of a firm's inputs is fixed

question

Total product curve

answer

question

Marginal product of input curve

answer

Shows how additional quantity of output changes by using one more unit of input
Increases then decreases- slope of total product curve

question

Marginal product equation

answer

MP = change in quantity of output/change in quantity of input

question

Diminishing returns to labor

answer

Increase in quantity of input leads to decline in MP when other levels of input are fixed, leads to negative slope of MP eventually

question

What happens to TP and MP curves if there are higher quantities of other inputs

answer

Shift upwards

question

Three stages of MP curve

answer

Increasing returns (positive slope), diminishing returns (flattening slope), negative returns (negative slope)

question

Fixed cost

answer

Cost that doesn't change no matter how much good is produced, cost of fixed inputs, cost at output 0 (insurance, salaries, equipment)

question

Variable cost

answer

Cost that depends on quantity of output produced, cost of variable input (ingredients)

question

Total cost

answer

TC = FC + VC
Calculate by finding areas of rectangles on graph

question

Total cost curve

answer

Shows how total cost depends on quantity of output
Increases as decreasing rate then increases at increasing rate bc of diminishing returns to input- marginal cost decreases then increases

question

Variable cost curve

answer

Starts at origin and increases at decreasing rate then increases at increasing rate

question

Fixed cost curve

answer

straight horizontal line

question

Marginal cost curve

answer

Shows how total cost changes by producing one more output
Decreases then increases bc of diminishing returns to input- slope of total cost curve

question

Marginal cost equation

answer

MC = change in TC / change in Q output

question

Average total cost

answer

ATC = TC/Q
ATC = AVC + AFC
U-shaped- decreases then increases
Minimum intersects MC

question

Average fixed cost

answer

Cost per unit of output, always falls
AFC = FC/Q

question

Average variable cost

answer

Variable cost per unit of output, decreases then increases and gets closer to ATC curve
Minimum intersects MC
AVC = VC/Q

question

What is the space between ATC and AVC

answer

AFC- gets closer and closer to x axis

question

Spreading effect

answer

question

Diminishing returns effect

answer

question

Minimum-cost output

answer

Quantity of output at which average total cost is lowest, bottom of ATC curve
MC intersects ATC at minimum

question

Principles of firm's MC & ATC curves

answer

ATC = MC at minimum-cost output
ATC > MC at outputs less than minimum
ATC < MC at outputs greater than minimum

question

Why does MC curve decrease then increase

answer

question

ATC of low fixed cost in short run

answer

Lower at outputs lower than average output and higher at outputs higher than average output- increase in fixed cost outweighs reduction in variable cost from greater production only at low inputs

question

ATC of high fixed cost in short run

answer

Higher at outputs less than average and lower at outputs greater than average- reduction of variable costs outweigh increase in fixed costs only at high inputs

question

Long run average total cost curve

answer

Shows relationship between output and ATC when fixed cost has been chosen to minimize ATC for each level of output
U-shaped- decreases then increases

question

Scale

answer

Size of firm's operations

question

Economies of scale

answer

factors that cause a producer's LRATC to fall as output rises
Occurs at low outputs

question

Increasing returns to scale

answer

when output increases more than in proportion to an increase in all inputs, when LRATC declines, economies of scale

question

Diseconomies of scale

answer

When LRATC increases as output increases

question

Decreasing returns to scale

answer

when output increases less than in proportion to an increase in all inputs, LRATC is increasing, diseconomies of scale

question

Constant returns to scale

answer

when output increases directly in proportion to an increase in all inputs, LRATC is constant

question

Reasons for economies of scale

answer

Specialization
Very large initial setup cost
Network externalities

question

Reasons for diseconomies of scale

answer

Poor communication and coordination

question

Sunk cost

answer

Cost that has already been incurred and is nonrecoverable, should be ignored in a decision about future actions

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