Output and Costs
|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.|
|average variable cost (AVC)|| total variable cost per unit of output.|
|average total cost (ATC)|| total cost per unit of output.|
ATC=AFC + AVC
|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.|