CH:14 Econ set

Fixed input

cannot be changed in short run

fixed inputs examples

buildings, equipment, weekly pay roll

variable input

when quantity can change at any time

TC gets steeper as the quantity of output increases.Why?

because diminishing returns. The cost of making each extra unit rises as you produce more

marginal product of Labor

how much extra stuff do i get if i add one more worker?

and the numbers decrease bc of diminishing returns

MPL unit ?

an additional hour of labor

Total Product Curve

shows how the total output changes as you add more workers

Increasing Returns

A stage in the total product curve where hiring more workers significantly increases output.

Diminishing Returns

A stage in the total product curve where adding more workers leads to smaller increases in output.

Negative Returns

A phase in the total product curve where too many workers lead to decreased total output.

Marginal Product Line

increase in the quantity of output when you increase the quantity of labor by one .

Fixed Cost

Costs that do not change with the amount of output produced, such as rent.

what are the costs that are in the short run and why?

fixed costs bc think of like rent you cant change

what are the costs that are in the long run and why?

all inputs are variable costs

what was a FC turns into a VC

what is more efficient long-run or short-run, why?

Long-run is more efficient bc ATC at any quantity uses most efficent mic of inputs for that Q

Variable Cost

Costs that vary directly with the level of output, such as wages paid to workers.

Marginal Cost

The additional cost incurred from producing one more unit of output.

Spreading Effect

When your AFC decreases bc it is being spread out evenly.

That makes ATC decrease because now you can make more while keeping cost low

Diminishing Returns Effect

Each extra unit costs more to make than the one before.

Economies of Scale ( left area ) ATCs

• As the output increases, the average cost decreases.

• Efficiency is gained due to increased production capabilities.

• Example: A factory generating more products at a lower per-unit cost due to larger scale production.

constant returns scale (ATCm) middle

when production increases, the avg cost remains constant

ex: a factory opening at optimal capacity, regardless of size, maintaining same cost per unit

Diseconomies of Scale

• further increase in output leads to increased avg costs

• occurs when a company grows too large, leading to inefficiencies.

• ex: management problems arise increasing operational costs

LRATC is the sum of

all short runs minimum

when MC crosses through ATC and AVC the minimum point means

• minimum cost of production is achieved

• lowest possible ATC

ATC=MC at what point

lowest cost point

diminishing returns effect = more workers = less efficient =

high ATC