economics

Production function

Q=TP= f(kbar,L)

Short run

Marginal production

MP= change in TP / change in L

Average production

AP=TP/L

MP slope

Steep when mp increases

Total cost

Tc= TVC (labor) + TFC (capital)

Marginal cost

MC = change in TVC / change in Q

average total cost

ATC = TC / Q

ATC = AVC + AFC

MP and MC relationship

As MC goes up, MP goes down

TVC and TC relationship

TVC and TC have the same slope

TC starts at TFC line

Long run cost curves

No fixed costs or inputs, ATC = AVC = AC

Long run economies of scale

• 0-1 = LR AC goes down, economies of scale, production goes up, AC goes down because of specialization and experience

• 1-2 = constant economies of scale

• 2-3 = LR AC goes up, diseconomies of scale, running into problems, management issues from larger production process