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Short Run
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time frame in which quantity of at least one factor of production is fixed.
- Fixed factors of production are called the firm's plant.
- Fixed factors of production are called the firm's plant.
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Long run
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time frame in which the quantities of all factors of production can be verified
- Long run is a period in which the firm can change its plant
- Long run is a period in which the firm can change its plant
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Sunk Cost
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Past expenditure on a plant that has no resale value.
- These are irrelevant to the firm's current conditions
- These are irrelevant to the firm's current conditions
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- Short-run cost of changing its labor inputs
- Long-run cost of changing its plant
- Long-run cost of changing its plant
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What are the only costs that influence a firm's current decisions?
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Total Product
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maximum output that a given quantity of labor can produce
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Marginal Product
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increase in total product that results from a one-unit increase in the quantity of labor employed, with all other inputs staying the same.
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Average product
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total output (or product) / quantity of variable input (or labor employed)
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- Points above the curve: unattainable
- Points below the curve: attainable
- Points on the curve: technologically efficient
- Points below the curve: attainable
- Points on the curve: technologically efficient
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Points on the Total Product Curve
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Fixed input (or factor)
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any resource for which a quantity cannot change during the period of time under consideration
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Examples of fixed factors
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- Firm's management organization structure
- Level of technology
- Buildings
- Large equipment
(all these are called the firm's plant)
- Level of technology
- Buildings
- Large equipment
(all these are called the firm's plant)
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Variable input (or factor)
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Any resource for which the quantity can change during the period of time under consideration
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Production function
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relationship between the maximum amounts of output that a firm can produce and various quantities of inputs
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Law of diminishing returns
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Principle that beyond some point the marginal product decreases as additional units of a variable factor are added to a fixed factor
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- When MP exceeds the AP, the AP increases
- When MP is less than AP, the AP decreases
- MP equals AP when the AP is at its maximum
- When MP is less than AP, the AP decreases
- MP equals AP when the AP is at its maximum
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How are the marginal product curve and the average product curve related?
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Total fixed cost (TFC)
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Costs that do not vary as output varies and that must be paid even it output is zero
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Total variable cost (TVC)
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Costs that are zero when output is zero and vary as output varies
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Total cost (TC)
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Sum of total fixed cost and total variable costs at each level of output
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Average fixed cost
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total fixed cost / quantity of output produced
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Average variable cost
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total variable cost / quantity of output
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Average total cost
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total cost / quantity of output
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- Over the range of output, when AP curve is rising, AVC curve is falling
- When AP curve is falling, AVC curve is rising
- When AP curve is falling, AVC curve is rising
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Relationship between AVC curve and average product (AP) curve
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- Over range of output, when MP curve is rising, MC curve is falling
- When MP curve is falling, MC curve is rising
- When MP curve is falling, MC curve is rising
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Relationship between MC curve and MP curve
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- Technology
- Resource prices
- If resource prices fall, cost curve will shift downward
- Higher taxes or more regulation = shift upward
- Increase in technology that allows more output to be produced from same resources = shift downward
- Resource prices
- If resource prices fall, cost curve will shift downward
- Higher taxes or more regulation = shift upward
- Increase in technology that allows more output to be produced from same resources = shift downward
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What makes a cost curve shift?
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Long-run marginal cost curve
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Additional cost of producing an additional unit of output when all inputs, including plant size can be varied
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Long-run average total cost
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lowest per unit cost of producing any level of output when the usage of all inputs can be varied
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Average variable cost
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Diminishing returns cause which of the following costs to eventually increase?
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Average fixed cost
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continually declines with increasing output.
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downward shift in total product or an increase in the price of a productive resource
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A firm's short-run cost curves will shift upward if there is a
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Falling
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When the average product is greater than the marginal product, then the average product is
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