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Econ Chpt. 11 (Behind the Supply Curve: Inputs and Costs)
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Terms in this set (27)
an organization that produces goods and services for sale. objective: maximize profits.
a firm
describes the relationship between output produced and inputs used
production function
inputs whose quantity is fixed for a period of time and cannot be varied
fixed inputs
inputs whose quantity the firm can vary at any time.
variable inputs
the short-run version of the production function, i.e. when some of the inputs are fixed
total product function
shows the relationship be- tween the quantity of output produced and the quantity of variable input used, for a given amount of the fixed input.
total product curve
the additional quantity of output from using one more unit of labor (delta Q/ delta L)
marginal product of labor (MPL)
What increases MPL?
specialization
The amount paid for the fixed inputs. does not depend on the quantity of output produced.
fixed cost (FC)
The amount paid for the variable input. depends on the quantity of output produced.
variable cost (VC)
the sum of the fixed cost and variable costs
total costs
As the total product curve gets steeper, the total cost curve gets flatter resulting in a _____ MPL
increasing
As the total product curve gets flatter, the total cost curve gets steeper resulting in a ______ MPL.
decreasing
the additional cost the firm incurs when it produces another unit of output
marginal cost
is equal to total cost divided by the quantity of output produced. It is the cost of a typical (or the average) unit of output (as opposed to the last or marginal unit of output).
average total cost (ATC)
the larger the output, the greater the quantity of output over which fixed cost is spread, leading to lower average fixed cost. This is the more important effect driving the downward slope of the ATC.
spreading effect
if the marginal product of labor is initially in- creasing, this causes marginal cost to be downward sloping, which in turn causes the average variable cost to be downward sloping.
increasing returns effect
the opposite of the increasing returns effect. When the marginal product of labor increases, marginal cost increases, causing the average variable cost to increase as well. At some point the increases in average variable costs become larger than the decreases in average fixed cost (the spreading effect), making the ATC curve upward sloping.
diminishing returns effect
When the spreading and diminishing returns exactly balance each other. At that point, the ATC curve "turns" from downward to upward sloping and is at its minimum. occurs at the intersection between the average total cost ATC curve and the marginal cost curve
minimum-cost output
At output less than the minimum-cost output, marginal cost is ______ than average total cost and average total cost is _______.
less; falling
At output greater than the minimum-cost output, marginal cost is ______ than average total cost and average total cost is ______.
greater; rising
time horizons under which at least one of the inputs is fixed
short run
the relationship between output and average total cost when fixed inputs cannot be adjusted.
short-run average total cost (SRATC)
the relationship between output and average total cost when fixed costs have been chosen to minimize average total cost for each level of output.
long-run average total cost (LRATC)
when output increases, long-run average total cost declines. Possible reasons for IRS are specialization, large setup costs, and network effects.
Increasing returns to scale (IRS)
when output increases, LRATC stays the same.
Constant returns to scale (CRS)
when output increases, LRATC increases.
decreasing returns to scale (DRS)
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