microeconomics- production function

notes for 1/11 quiz

Time frame in which the quantity of one or more resources used in production is fixed.

Short Run

Firm's plant - capital, land, and entrepreneurship

Fixed factors

Labor, raw materials, and energy

variable factors in the short run

To increase output in short run, firm must (increase or decrease) the quantity of variable factors.

increase

Time frame in which the quantities of all resources—including the plant size—can be varied.

Long Run

Cost incurred by the firm and cannot be changed.

Sunk Cost

Total output produced in a given period

total product (TP)

As the quantity of labor employed increases: total product (increases or decreases)

increase

As the quantity of labor employed increases: Marginal Product (increase or decreases)

increases initially but eventually decreases

As the quantity of labor employed increases: average product (increase or decrease)

decrease

The change in total output that results from a one-unit increase in the quantity of labor employed, with all other inputs remaining the same.

Marginal Product of Labor

Equal to total product divided by the quantity of labor employed.

Average product of labor

Arise from increased specialization and division of labor.

Increasing marginal returns

Arises because each additional worker has less access to capital and less space in which to work.

Diminishing marginal returns

When marginal product exceeds average product, average product (increases or decreases).

increases

When marginal product is below average product, average product (increases of decreases)

decreases

When marginal product equals average product, average product is at its (maximum or minimum).

maximum

The cost of the firm's fixed inputs (land, machinery, loans)

fixed cost (FC) (or total fixed cost TFC)

The cost of the firm's variable inputs.

variable cost (VC) (or total variable cost TVC)

Total Cost \=

Fixed cost + variable cost

The cost of a typical unit of output produced. The mean value of the Total Cost.

Average total cost (ATC)

Average total cost (ATC) \=

Total cost / the quantity of output

Average variable cost (AVC) \=

Variable cost / the quantity of output

Average fixed cost (AFC) \=

Fixed cost / the quantity of output

The increase in Total Cost that results from a one unit increase in total product

marginal cost (MC)

marginal cost (MC) \=

change in total cost / change in total quantity

The AFC curve (increases or decreases) as output increases.

decreases

Variable cost (increases or decreases) as output increases.

increases

Total cost (increases or decreases) as output increases

increases

Over the output range with increasing marginal returns, marginal cost (rises or falls) as output increases.

falls

Over the output range with diminishing marginal returns, marginal cost (rises or falls) as output increases.

rises

MC equals ATC at the (maximum or minimum)

minimum

MC is at its minimum at the same output level at which MP is at its (maximum or minimum)

maximum

When MP is rising, MC is (rising or falling)

falling

AVC is at its minimum at the same output level at which AP is at its (maximum or minimum)

maximum

When AP is rising, AVC is (rising or falling).

falling

The position of a firm's short run cost curves depends on two factors:

technology and prices of factors of production

An increase in productivity shifts the product curves (upward or downward) and the cost curves (upward or downward).

upward; downward

An increase in the price of a factor of production (increases or decreases) costs and shifts the cost curves

increases

An increase in a (fixed or variable) cost shifts the total cost (TC ) and average total cost (ATC ) curves upward but does not shift the marginal cost (MC ) curve, variable cost (VC) and average variable cost (AVC).

fixed

An increase in a (fixed or variable) cost shifts the total cost (TC ), average total cost (ATC ), and marginal cost (MC ) curves upward but does not shift fixed cost (FC) and average fixed cost (AFC) curves

variable

The size of the production process

scale

economies of scale

increasing returns of scale

Diseconomies of scale

decreasing returns to scale

1. Occur when increasing production allows greater specialization Workers produce more efficiently when focusing on a specialized task.

economies of scale

1. Due to coordination problems in large organizations when management becomes stretched

diseconomies of scale

the increase in output resulting from a one-unit increase in the amount of capital employed, holding constant the amount of labor employed.

Marginal product of capital

The larger the plant, the greater is the output at which ATC is at a (maximum or minimum)

minimum

Economies of scale are features of a firm's technology that lead to (rising or falling) long-run average cost (LRAC) as output increases.

falling

Diseconomies of scale are features of a firm's technology that lead to (rising or falling) long-run average cost (LRAC) as output increases.

rising

The smallest quantity of output at which the long-run average cost reaches its lowest level.

Minimum efficient scale

If the LRAC curve is U-shaped, the minimum point identifies the \_______ \______ \______ output level.

minimum efficient scale

true or false: the marginal cost curve intersects the average fixed cost curve at its minimum

false

true or false: When marginal cost is greater than average variable cost, average variable cost is increasing

true

true or false: When marginal cost is less than average variable cost, average variable cost is decreasing

true

true or false: the marginal cost curve intersects the average variable cost at its minimum

true

Features of a​ firm's technology that lead to falling​ long-run average cost as output increases.

Economies of scale

Features of a​ firm's technology that lead to rising​ long-run average cost as output increases.

diseconomies of scale

When economies of scale are​ present, the LRAC curve​ (slopes downward or slopes upward).

slopes doward

When diseconomies of scale are​ present, the LRAC curve​ (slopes downward or slopes upward).

slopes upward

As a firm uses more of a variable​ input, given the quantity of fixed​ inputs, the marginal product of the variable input eventually diminishes.

law of diminishing returns

In a diagram with the total cost curve and the total variable cost​ curve, as output​ increases, the vertical distance between these two curves

A.is constant.

B. increases

C.decreases.

D.gets smaller and then bigger again.

A. is constant