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long run
answer
A period in which a firm can vary all inputs, such as adopting new technologies, and changing the size of its physical plant
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short run
answer
a period in which at least one of a firm's inputs is fixed
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variable costs
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cost that change as output changes
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fixed costs
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costs that remain constant as output changes
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Total Cost
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the cost of all inputs used in production
- equal to the sum of fixed and variable costs
TC= FC+VC
- equal to the sum of fixed and variable costs
TC= FC+VC
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explicit costs
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costs that involve explicitly spending money
- sometimes called "Accounting Cost"
ex. issuing paycheck to an employee
- sometimes called "Accounting Cost"
ex. issuing paycheck to an employee
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implicit costs
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opportunity cost that do not involve explicitly spending money e.g. the salary you could have earned doing something else10
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economic cost
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cost that are both implicit and explicit
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production function
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the relationship between the inputs employed by a firm and the maximum output it can produce with those inputs
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marginal product of labor
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the change in output from hiring one additional unit of labor
in our example, the additional output from hiring one more worker◦ 𝑀𝑃𝐿 = ∆𝑄/∆𝐿
in our example, the additional output from hiring one more worker◦ 𝑀𝑃𝐿 = ∆𝑄/∆𝐿
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Specialization
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the development of skills in a specific kind of work.MPL initially rises due to Specialization But MPL eventually falls
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law of diminishing returns
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the principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline. e.g. too many pizza chefs crowding around a fixed number of ovens23
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average product of labor
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the total output produced by a firm divided by the quantity of workers.𝐴𝑃𝐿 = 𝑄/𝐿
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marginal cost
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the increase in total cost from producing one more unit of output◦ 𝑀𝐶 = ∆𝑇𝐶/∆𝑄
Marginal Cost initially falls due to specialization◦ When MPL is rising, MC is falling Marginal Cost eventually rises due to the Law of DiminishingReturns◦ When MPL is falling, MC is rising41
Marginal Cost initially falls due to specialization◦ When MPL is rising, MC is falling Marginal Cost eventually rises due to the Law of DiminishingReturns◦ When MPL is falling, MC is rising41
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average total cost
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total cost divided by the quantity of output
ATC=TC/Q
ATC=TC/Q
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average fixed cost
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fixed cost divided by the quantity of output
AFC= ATC-AVC
AFC= ATC-AVC
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long-run average cost curve
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a curve that shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed
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economies of scale
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factors that cause a producer's average cost per unit to fall as output rises, when long-run average cost falls as output increases Examples◦ Ability to adopt large-scale technologies◦ Specialization among work functions◦ Bargaining power over input prices61
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diseconomies of scale
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the property whereby long-run average total cost rises as the quantity of output increases, difficulty managing a large portion. LONG RUN CONCEPT
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constant returns to scale
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the property whereby long-run average total cost stays the same as the quantity of output changes. when long-run average cost remains constant as output increases
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minimum efficient scale
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the output at which all economies of scale are exhausted◦ when LRAC is at a minimum In perfectly competitive markets:◦ Firms tend to produce at their Minimum Efficient Scale65
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