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TP (Q)

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Total Product or Quantity.

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MP=

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∆TP/∆L

Marginal Product formula

Marginal Product formula

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AP=

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TP/L or Q/L

Average product. The total product divided by the total Q of the labor input

Average product. The total product divided by the total Q of the labor input

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TFC

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Total fixed cost. The cost of all the firm's fixed inputs (does not depend on the level of output)

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TVC

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Total variable cost. The cost of all the firm's variable inputs.

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TC=

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TFC+TVC

Total cost. Cost of all productive resources used by a firm. (if L is the only variable input then w is the wage soo, LxW)

Total cost. Cost of all productive resources used by a firm. (if L is the only variable input then w is the wage soo, LxW)

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MC=

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∆TVC/∆Q or Wage Paid/MP of L

Marginal Cost. Increase in total cost that results from a one-unit increase in output. Is the slope of the TVC curve. Decreases at low outputs bc of gains from specialization but eventually increases due to law of dim returns

Marginal Cost. Increase in total cost that results from a one-unit increase in output. Is the slope of the TVC curve. Decreases at low outputs bc of gains from specialization but eventually increases due to law of dim returns

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AFC=

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TFC/Q

Average fixed cost. Always declines bc the numerator (TFC) does not change while the denom Q increases as more outputs are produced.

Average fixed cost. Always declines bc the numerator (TFC) does not change while the denom Q increases as more outputs are produced.

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AVC=

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TVC/Q or W/AP

Average Variable cost. U shaped, at first, it declines bc tvc increases at a decreasing rate but due to diminishing returns the TVC starts increasing at an increasing rate but the denom continues to increase linearly

Average Variable cost. U shaped, at first, it declines bc tvc increases at a decreasing rate but due to diminishing returns the TVC starts increasing at an increasing rate but the denom continues to increase linearly

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ATC=

Average Total Cost

Average Total Cost

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TC/Q=AFC+AVC

- U shaped

-Declines bc TC incr at decr rate while denom incr linearly

-Due to diminishing returns TC starts incr at incr rate while denom still incr linearly

- U shaped

-Declines bc TC incr at decr rate while denom incr linearly

-Due to diminishing returns TC starts incr at incr rate while denom still incr linearly

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LRAC (long run average cost curve)

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TC/Q

Frankenstein curve

Frankenstein curve

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Production Function

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the relationship between the max output attainable and the Qs of both labor and capital. All inputs are variable and all costs are variable.

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Short Run

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A time frame in which the Q of at least one input is fixed and other Qs of other inputs can be varied

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Long Run

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A time frame in which the Qs of all inputs can be varied

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Diminishing Marginal Returns

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Occur when the MP of an additional worker is less than the MP of the previous worker. TP increases at a decreasing rate

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Law of Diminishing Returns

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As a firm uses more variable input, with a given quantity of fixed inputs, the MP of the variable input eventually diminishes.

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Sunk Cost

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a cost that has already been committed and cannot be recovered

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Returns to scale

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The increases in output that result from increasing all inputs by the same %

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Economies of Scale (AKA increasing returns to scale)

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technological conditions under which a given % increases in all the firm's input's results in the firm's output increasing by a larger %. LRAC is falling. ex. TC(doubles)/Q()more than doubles)

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Constant Returns to scale

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Technological conditions under which a given % increases in all the firm's inputs results in the firm's output increasing by the same %. LRAC is constant ex. TC(doubles)/Q(doubles)

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Diseconomies of scale (aka decreasing returns to scale)

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Technological conditions under whihc a given % increases in all the firms inputs results in the firm's output increasing by a smaller %. LRAC is rising. EX TC(doubles)/Q(less than doubles)

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Minimum efficient scale

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Smallest Q of output at which LRAC reaches its lowest level.

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Rules of Marginal and average relationships

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- If MP > AP, then AP is rising

- If MP < AP, then AP is falling

-When MP = AP, then AP is at its most extreme (AP is at maximum)

- If MP < AP, then AP is falling

-When MP = AP, then AP is at its most extreme (AP is at maximum)

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Three Short Run Costs Without AFC

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Rising

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If the marginal product of labor is 3 and the average product of labor is 4 at the current level of output, is average variable cost rising or falling?

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Slide 37*

1. Rising MP and Falling MC. Rising AP and Falling AVC---2. Falling MP and rising MC. Rising AP and falling AVC---3. Falling MP and rising MC. Falling AP and rising AVC

1. Rising MP and Falling MC. Rising AP and Falling AVC---2. Falling MP and rising MC. Rising AP and falling AVC---3. Falling MP and rising MC. Falling AP and rising AVC

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average product and marginal product AP MP

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