Output and Costs
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Created by:
PrincessaKayla on March 29, 2011
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41 terms
Terms | Definitions |
|---|---|
 profit maximization | the firm makes many decisions to achieve its main objective |
| short run | a time frame in which the quantity of one or more resources used in production is fixed. -labor, raw materials, and energy can be changed in the short run. -short run decisions are easily reversed. |
| plant | "capital"; it is fixed in the short run |
| long run | time frmae in which the quantities of all resources-including plant size-can be valued. -long run decisions are not easily reversed. |
| sunk costs | a cost incurred by the firm and cannot be changed. -sunk costs are irrelevant to a firm's decisions. |
| short-run technology constraint | to increase output in the short run, a firm must increase the amount of labor employed. |
| product schedules | total product, marginal product, average product |
| total product | total output produced in a given period |
| marginal product | the change in total product that results from a one-unit increase in the quantity of labor employed, with all other inputs remaining the same. |
| average product | equal to total product divided by the quantity of labor employed. TP/Q(of labor) |
| initially increasing marginal returns | when the marginal product of a worker exceeds the marginal product of the previous worker, the marginal product of labor increases and the firm experiences increasing marginal returns. |
| eventually diminishing marginal returns | when the marginal product of a worker is less than the marginal product of the previous worker, the marginal product of labor decreases and the firm experiences diminishing marginal returns. |
| law of diminishing returns | as a firm uses more of a variable input with a given quantity of fixed inputs, the marginal product of the variable input eventually diminishes. |
| when marginal product equals average product... | average product is at its maximum. |
| short-run cost | to produce more output in the short run, the firm must employ labor, which means that it must increase its costs. |
| total cost (TC) | cost of all resources uses. -sum of TFC and TVC -increases as output increases. |
| total fixed cost (TFC) | the cost of the firm's fixed inputs. *fixed costs do not change with output. |
| total variable cost (TVC) | the cost of the firm's variable inputs. *variables do not change with output. |
| TC=TFC+TVC | total costs = total fixed cost + total variable cost |
| marginal cost (MC) | the increase in total cost that results from a one-unit increase in total product. -increasing marginal returns, MC falls as output increases. -diminishing marginal returns, MC rises as output increases. |
| average cost | can be derived from AFC, AVC, ATC |
| average fixed cost (AFC) | total fixed cost per unit of output. -TFC/Q |
| average variable cost (AVC) | total variable cost per unit of output. -TVC/Q |
| average total cost (ATC) | total cost per unit of output. ATC=AFC + AVC ATC= TC/Q |
| where AVC is falling... | MC is below AVC |
| where AVC is rising... | MC is above AVC |
| at the minimum AVC, | MC equals AVC |
| ATC falls at low output levels... | because AFC is falling steeply. |
| MC is at its minimum... | at the same output level at which marginal product is at its maximum. |
| when MP is rising... | MC is falling |
| AVC is at its minimum... | at the same output level at which average product is at its maximum |
| when AP is rising... | AVC is falling |
| an increase in a fixed cost... | shifts the TC and ATC curves upward but does NOT shift the MC curve. |
| an increases in a variable cost... | shifts the TC and ATC and MC curves upward. |
| the production function | the relationship between the maximum output attainable and the quantities of both capital and labor. |
| marginal product of capital | the increase in output resulting from a one-unit increase in the amount of capital employed, holding constant the amount of labor employed. |
| long-run average cost curve | the relationship between the lowest attainable average total cost and output when both the plant size and labor are varied. |
| economies of scale | features of a firm's technology that lead to falling long-run average cost as output. |
| diseconomies of scale | features of a firm's technology that lead to rising long-run average cost as output increases |
| constant returns of scale | features of a firm's technology that lead to constant long-run average cost as output increases. |
| minimum efficient scale | the smallest quantity of output at which the long-run average cost reaches its lowest level. |
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