question
What is a production function?
answer
It describes the relationship between any given combination of inputs and the maximum attainable output from those inputs, given the current technology.
question
What is the short run?
answer
A period of production in which some inputs cannot be varied (i.e. number of machines, space for the machines). There is some flexibility (labor is flexible), but not much. There is a limit to what can be produced.
question
What is the long run?
answer
A period of production long enough for all inputs to be varied (i.e. can move plants and get more space, purchase more machinery, etc.). There is flexibility and the amount of production can be varied.
question
When studying production, what is the main assumption?
answer
We are in the short run and labor is variable while capital (k) is not.
question
What is the total product curve?
answer
The amount of output produced by a given amount of labor. (It answers the question, given a certain amount of workers, how much will I be able to produce?)
question
What is the marginal product of labor?
answer
The extra output produced with one more unit of labor.
question
How do you calculate marginal product of labor?
answer
(the change in quantity produced)/(the change in labor)
question
What is the point of diminishing returns?
answer
The point at which marginal product of labor begins to decline
question
What is the average product of labor?
answer
The output per unit labor. This is a measure of labor productivity.
question
How do you calculate average product of labor?
answer
the total quantity produced/the total amount of labor used to produce this quantity
question
What happens to the average product of labor if the marginal product of labor is less than the average product of labor?
answer
The average product of labor will decrease.
question
What happens to the average product of labor if the marginal product of labor is more than the average product of labor?
answer
The average product of labor will increase.
question
What is occurring if the marginal product of labor is equal to the average product of labor?
answer
The average product of labor is at its maximum.
question
What is economic cost?
answer
The monetary value of all inputs used including implicit costs which measure the value of non purchased items (i.e. it measures the value of the opportunity costs)
question
In the short run, what two categories are costs divided into?
answer
(1) Fixed costs
(2) Variable costs
(2) Variable costs
question
What are fixed costs?
answer
They do not vary with output and are sometimes called overhead costs.
question
What are variable costs?
answer
Costs that depends on the number of units of output produced.
question
What is total cost?
answer
The sum of fixed costs and variable costs.
question
How do you derive the variable cost curve?
answer
Switch the axes of the production function, which therefore flips the production function upside down.
question
What is the variable cost curve?
answer
It shows the variable cost associated with any given quantity produced. It answers the question, how much will it cost to produce a specific amount of product.
question
How do you derive the total cost function?
answer
You simply shift the variable cost curve up until it begins with the price of the fixed costs (since fixed costs are fixed and do not vary with output).
question
What does the average variable cost curve look like?
answer
A parabola-- because the average product of labor will first rise then fall in the short run, the average variable cost curve for a firm will decline and then increase again
question
What happens to the average variable costs when average product of labor increases?
answer
The average variable costs will decrease
question
How do you calculate average variable costs?
answer
(variable costs/quantity produced)
question
How do you calculate average cost?
answer
(total cost/quantity produced)
question
How do you calculate marginal cost?
answer
(the change in cost/the change in quantity produced)
question
What does the marginal cost curve look like?
answer
As quantity increases, it will decrease at first, reach a minimum, and then increase rapidly. It crosses the average variable cost curve at a minimum.
question
What happens to average variable costs if marginal cost increases?
answer
Average costs increase
question
What happens to average variable costs if marginal cost decreases?
answer
Average variable costs decreases
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