productino and its costs

2 functions affecting production and costs

• long run

• short run

short run

• fixed input

• variable input

fixed input

input whose quantity cannot be changed during the period of time under consideration

variable input

input whose quantity can be changed during a period of time under consideration

3 main product curves

• total product

• average product

• marginal product

function of production and its costs

shows relationship between firm’s input and output of g&s

long run

all inputs are variable (no fixed inputs)

total product

• marginal product

• shows output

marginal product

change in total output resulting in additional extra unit of variable input

output showed

produced when addiotnal units of variable input are added into the fixed input

marginal product formula

increase in total product / increase in variable input

average product formula

total product / variable input

marginal and avg product rs

• marginal product go up will pull avg product up

• marginal product less than avg product, pull avg product down

mp increase

variable input to fixed input improves

marginal product is at maximum (point of diminishing marginal returns)

variable input to fixed input combination optimal

out put increase at decreasing rate

too many variable input too little fixed input

law of diminishing return

beyond some point the marginal product decreases as additional units of a variable factor are added to a fixed factor

what affects short run total product

law of diminishing returns

relationship between production and costs

inversly related

cost of producing

affected by firm’s production function

fixed costs curve

• costs that dont vary as output varies, has to be paid even if there is no output

• horizontal line

• total fixed costs curve can shift up or down when fixed input changes

total costs formula

total fixed costs + total variable costs

total variable costs curve

• curve has to be from origin. zero costs when output is zero as varies as output varies

• positively sloped, output increases, total variable costs increases

• total variable costs increases with output level; increased output = total variable costs increases because more variable input is required

short run cost curves

• zero output

• total costs = total fixed costs because total variable costs is zero

• total cost > total variable costs because fixed cost is positive

• total costs & total variable costs will have same shape because fixed costs is a constant

• vertical gap between total costs & total variable costs = total fixed costs

average variable costs

• u shaped

• output increase, average variable costs decrease initially but will increase again

• diminishing returns means as output increases, even more variable input is required to produce an additional unit of output

average fixed costs formula

total fixed costs / quantity

relationship between average fixed costs & output

average fixed cause decrease as output increase