Chapter 14: Behind the Supply Curve

Production

process of turning inputs into outputs

The cost structure of a firm depends on the nature of the

production process

Production Function

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

Fixed input

input where quantity is fixed for a period and cannot be verified

Variable input

input whose quantity the firm can vary at any time

Long run

period in which all inputs can be varied

Short run

period in which at least one input is fixed

Total product curve

shows how the quantity of output depends on the quantity of the variable input for a given quantity of a fixed input

Marginal Product (of labor)

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

Marginal product initially _____ as more workers are hired; then it _____

rises ; declines

the relationship between inputs and outputs is 

positive but not constant

Marginal product

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

MPL =

ΔQ / ΔL

Fixed cost

cost that does not depend on the quantity of output produced

Variable cost

cost that depends on the quantity of output produced

Total cost of producing a given quantity of output

sum of the fixed cost and the variable cost of producing that quantity of output

TC = 

FC + VC

Total cost curve becomes _____ as more output is produced, a result of diminishing returns

steeper

Marginal cost

change in total cost generated by one additional unit of output

MC = 

ΔTC / ΔQ

Why is the Marginal cost curve upward sloping?

Because there are diminishing returns to inputs. As output increases, marginal product of the variable input declines

Average total cost = 

TC / Q

Average Fixed Cost =

FC / Q

Average variable cost =

variable cost per unit of output produced

Spreading effect

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

Diminishing returns effect

The longer the output, the more variable input required to produce additional units, which leads to higher average variable cost

A marginal cost is upward sloping because of

diminish returns

Average variable cost is _____ sloping but ______ than marginal cost curve

upward ; flatter

Average fixed cost is ________ sloping because of the spreading effect

downward

Marginal cost curve intersect the _____ curve from below, crossing it at its _____ point

average total cost ; lowest

All inputs are variable in the _______

long run

Diminishing returns to a factor

short run

Decreasing returns to scale, constant returns to scale, increasing returns to scale

Long run

There are increasing returns to scale (economics of scale) when

long-run average total cost declines as output increases

There are decreasing returns to scale (diseconomics of scale) when

long-run average total cost increases as output increases

There are constant returns to scale when

long-run average total cost is constant as output increases

When the marginal product of labor is increasing, marginal cost is:

decreasing

A curve represents …

Marginal cost curve

B curve represents…

Average total cost curve

C curve represents…

Average variable cost curve

D curve represents…

Average fixed cost curve