Chapter 14 - Behind the Supply Curve: Inputs and Costs

ECON:1100 Final Exam

Firm

an organization that produces goods or services for sale

Production

turning inputs into outputs

Production function

the relationship between quantity of inputs a firm uses and the quantity of output it produces

Lonr-run

the period in which all inputs can be varied

Short-run

the period in which at least one input is fixed

Marginal product

the additional quantity of output that is produced by using one more of that input

Marginal product of labor

change in output resulting from a one-unit increase in the amount of labor

What happens to the MPL as more workers are hired?

it declines, as employment increases the total product curve gets flatter

Diminishing returns to an input

an increase in the quantity of that input, holding the levels of all other inputs fixed, reduces that inputs MP

Fixed cost

a cost that does not depend on the quantity of output produced, cost of fixed input

Variable cost

a cost that depends on the quantity of output produced, the cost of the variable input

Total cost

the sum of the fixed cost and the variable cost of producing that quantity, TC=FC+VC

Total cost curve

shows how total cost depends on the quantity of output

Formula for marginal cost

change in TC / change in quantity of output

Average total cost formula

TC/Q

Average fixed cost formula

FC/Q

Average variable cost

VC/Q

What two effects does increasing output on ATC?

• the spreading effect

• diminishing marginal returns effect

What is the spreading effect?

the more output over which fixed cost is spread, leading to lower average fixed cost

What is the diminishing marginal returns effect?

the more variable input required to produce additional units, leads to higher AVC

Minimum-cost output

the quantity of output at which ATC is lowest

What are the three principles about a firm’s MC and ATC curve?

1. at minimum-cost output, ATC is equal to MC

2. at output less than the minimum cost output, MC is less than ATC and ATC is falling

3. at output greater than minimum-cost output, MC is greater than ATC, ATC is rising

Long-run ATC curve

the relationship between output and ATC when FC has been chosen to minimize ATC for each level of output

Increasing returns to scale(economies of scale)

when long-run ATC cost declines as output increases

Decreasing returns to scale(diseconomies of scale)

when long-run ATC increase as output increases

Constant returns to scale

when long-run ATC is constant as output increases