the firm makes many decisions to achieve its main objective
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.
"capital"; it is fixed in the short run
time frmae in which the quantities of all resources-including plant size-can be valued.
-long run decisions are not easily reversed.
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.
total product, marginal product, average product
total output produced in a given period
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.
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.
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.
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.
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.