question
Long Run Cost
answer
Diminishing marginal product of capital
-Marginal product of capital:
-->output rises resulting from a one-unit increase in amount of capital employed, holding constant # of labor employed
-Marginal product of capital:
-->output rises resulting from a one-unit increase in amount of capital employed, holding constant # of labor employed
question
Firms product function exhibits
answer
-diminishing marginal return to labor [given plant size]
-diminishing marginal returns to capital [given Q of labor]
-diminishing marginal returns to capital [given Q of labor]
question
Short Run & Long Run Cost
answer
Average cost of producing a given output varies and depends on a firms plant size
-larger the plant size, greater the output at which ATC is min
*Fixed cost rises when you get more machines
-larger the plant size, greater the output at which ATC is min
*Fixed cost rises when you get more machines
question
Long Run Average Cost Curve (LRAC Curve)
answer
Made up from lowest ATC for each output level
-need to decide which plant has the lowest cost of producing each output level
-shows the lowest average cost at which it is possible to produce each output when the firm has had sufficient time to change both its plant size and labor employed
-relationship between the lowest attainable average total cost and output when both the plant size and labor are varied
-LRAC curve is a planning curve ---> tells firm the plant size that will minimize the ATC of a given output
-shows what plant size you should use
-need to decide which plant has the lowest cost of producing each output level
-shows the lowest average cost at which it is possible to produce each output when the firm has had sufficient time to change both its plant size and labor employed
-relationship between the lowest attainable average total cost and output when both the plant size and labor are varied
-LRAC curve is a planning curve ---> tells firm the plant size that will minimize the ATC of a given output
-shows what plant size you should use
question
Plant Size and Cost
answer
-When a firm changes its plant size, its cost of producing a given output changes
-Each of these three outcomes arise because when a firm changes the size of its plant, it might experience:
-->economies of scale
-->diseconomies of scale
-->constant returns to scale
-Each of these three outcomes arise because when a firm changes the size of its plant, it might experience:
-->economies of scale
-->diseconomies of scale
-->constant returns to scale
question
Economies of Scale
answer
Firm's technology leads to LRAC decrease when when output increases
-exist if when a firm increases its plant size and labor employed by the same percentage, its output increases by a larger percentage and average total cost decreases
-the main source of economies of scale is greater specialization of both labor and capital
-exist if when a firm increases its plant size and labor employed by the same percentage, its output increases by a larger percentage and average total cost decreases
-the main source of economies of scale is greater specialization of both labor and capital
question
Dis-economies of Scale
answer
Firm's technology leads to LRAC increase when output increases
-exist if when a firm increase its plant size and labor employed by the same percentage, its output increases by a smaller percentages and average total cost increases
-arise from the difficulty of coordinating and controlling a large enterprise
-exist if when a firm increase its plant size and labor employed by the same percentage, its output increases by a smaller percentages and average total cost increases
-arise from the difficulty of coordinating and controlling a large enterprise
question
Minimum Efficient Scale
answer
Smallest Q of output at which LRAC reaches its lowest level
-firm experienced economies of scale up to a certain point
-beyond that, either diseconomy of scale, or constant returns to scale
-firm experienced economies of scale up to a certain point
-beyond that, either diseconomy of scale, or constant returns to scale
question
Returns to Factor
answer
SHORT RUN
-change in output when ANY ONE VARIABLE changes
-change in output when ANY ONE VARIABLE changes
question
Returns to Scale
answer
LONG RUN
-change in output when ALL FACTORS change simultaneously and proportionally
-change in output when ALL FACTORS change simultaneously and proportionally
question
Diminishing Marginal Product of Capital
answer
MP of capital = increase in output from a one-unit increase in amount of capital employed
question
Constant Q of Labor Employed
answer
Firm's production function exhibits:
-diminishing marginal returns to labor
-diminishing marginal returns to capital
-diminishing marginal returns to labor
-diminishing marginal returns to capital
question
Explicit Cost
answer
Cost paid in money
question
Implicit Cost
answer
An opp. cost incurred by a firm when it uses a factor of production for which it does not make a direct money payment
Two main implicit costs include:
1) Economic depreciation
2) Cost of using a firm owner's resources
Two main implicit costs include:
1) Economic depreciation
2) Cost of using a firm owner's resources
question
What consists of explicit costs?
answer
-Costs of food
-Wages
-Interest
-Wages
-Interest
question
What consists of implicit costs?
answer
-Forgone wages
-Forgone interest
-Economic depreciation
-Normal Profit
-Forgone interest
-Economic depreciation
-Normal Profit
question
Total Revenue
answer
TR = P x Qsold
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Economic Profit
answer
EP = TR - Opp. Cost
question
Opportunity Cost
answer
OC = Explicit Costs + Implicit Cost
question
Short Run
answer
FIXED PLANT
-A time frame in which the quantities of some resources are fixed
-Firm can usually change:
->Q of labor it uses but not the Q of capital
-A time frame in which the quantities of some resources are fixed
-Firm can usually change:
->Q of labor it uses but not the Q of capital
question
Long Run
answer
VARIABLE PLANT
-A time frame in which the quantities of all resources can be changed
-A sunk cost is irrelevant to the firm's decisions
-A time frame in which the quantities of all resources can be changed
-A sunk cost is irrelevant to the firm's decisions
question
Short-Run Production
answer
-To increase output w/ a fixed plant, a firm must increase the quantity of labor it uses
-We describe the relationship b/t output and the quantity of labor by using three related concepts:
1) Total Product
2) Marginal Product
3) Average Product
-We describe the relationship b/t output and the quantity of labor by using three related concepts:
1) Total Product
2) Marginal Product
3) Average Product
question
Total Product
answer
Total Q of a good produced in a given period
-an output rate [the # of units prod. per unit of time]
-increases as the quantity of labor employed increases
-an output rate [the # of units prod. per unit of time]
-increases as the quantity of labor employed increases
question
Marginal Product
answer
The change in total product that results from a one-unit increase in the quantity of labor employed
MP = Change in TP / Change in Q of labor
MP = Change in TP / Change in Q of labor
question
Law of Decreasing Returns
answer
As a firm uses more of a variable input, with a given quantity of fixed inputs, the MP of the variable input eventually decreases
question
Average Product
answer
Total product per worker employed
AP = TP / Q of labor
AP = TP / Q of labor
question
Short-Run Cost
answer
To prod. more output in the short run, a firm employs more labor, which means the firm must increase its costs
-Total cost
-Marginal cost
-Average cost
-Total cost
-Marginal cost
-Average cost
question
Total Cost
answer
The cost of all the factors of production the firm uses
*Divides into who parts:
-Total fixed cost
-Total variable cost
*Divides into who parts:
-Total fixed cost
-Total variable cost
question
Total Fixed Cost
answer
The cost of a firm's fixed factors of production used by a firm
-The cost of:
1) Land
2) Capital
3) Entrepreneurship
-Doesn't change as output changes
-The cost of:
1) Land
2) Capital
3) Entrepreneurship
-Doesn't change as output changes
question
Total Variable Cost
answer
The cost of the variable factor of production used by a firm - the cost of labor
-To change its output in the short run, a firm must change the quantity of labor it employs, so TVC changes as output changes
TC = TFC + TVC
-To change its output in the short run, a firm must change the quantity of labor it employs, so TVC changes as output changes
TC = TFC + TVC
question
Marginal Cost
answer
The change in TC that results from a one-unit increase in TP
-tells us how TC changes as TP changes
-tells us how TC changes as TP changes
question
Average Fixed Cost
answer
Total fixed cost / output
question
Average variable cost
answer
TVC / Output
question
Average total cost
answer
TC / Output
question
An increase in rent or another component of fixed cost
answer
-Shifts the fixed cost curves (TFC and AFC) upward
-Shifts the total cost curve (TC) upward
-Leaves the variable cost curves (AVC and TVC) and the marginal cost curve (MC) unchanged
-Shifts the total cost curve (TC) upward
-Leaves the variable cost curves (AVC and TVC) and the marginal cost curve (MC) unchanged
question
An increase in the wage rate or another component of variable cost
answer
-Shifts the variable curves (TVC and AVC) upward.
-Shifts the marginal cost curve (MC) upward.
-Leaves the fixed cost curves (AFC and TFC) unchanged.
-Shifts the marginal cost curve (MC) upward.
-Leaves the fixed cost curves (AFC and TFC) unchanged.
question
Long-Run Average Cost Curve
answer
Shows the lowest average cost at which it is possible to produce each output when the firm has had sufficient time to change both its plant size and labor employed
-traces the lowest attainable ATC of producing each output
-traces the lowest attainable ATC of producing each output
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