Unit 3 Microeconomics

Production function

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

Inputs to the production function

(Commonly known as the factors of production)

Land, labor, and capital (tools, equipment, machinery)

What is marginal product, average product, and total product?

Marginal product- the extra unit of output produced by adding one more unit of input

Average product- amount of output produced per unit of inputs (fixed + variable) output/input

Total product- total quantity of output produced

What is the relationship between marginal product, average product, and total product?

They all describe how the output changes as a firm alters a variable input (such as labor) while holding other inputs constant (such as capital)

Relationships between TP, AP, and MP

Increasing returns- when MP is rising, TP curve rises at an increasing rate

Diminishing returns- When MP is falling but still positive, the TP curve continues to rise, but at a decreasing rate

Maximum TP- When MP equals zero (\(\text{MP} = 0\)), the TP curve reaches its maximum point.

Negative returns- When MP becomes negative, the TP curve starts to fall

What does diminishing marginal returns mean? What would a graph for this concept look like?

This means that an increase to the input leads to a decline in its marginal product

Ex. Too many cooks in the kitchen

Fixed costs

A cost that does not depend on the quantity of output produced (stays the same, even when Q produced is 0)

Variable cost

A cost that depends on the quantity of output produced

What is marginal cost, average fixed cost, average variable cost, and average total cost? How would you draw these on a graph?

Marginal cost- the change in total cost from producing one more unit of output

Average variable cost-