Production inputs and costs

what is a firms production costs?

Production is the process of turning inputs into outputs

what is a fixed input?

An input whose quantity is fixed for a period of time and cannot be varied

what is a variable input?

An input whose quantity the firm can vary at any time

what happens in the long run?

all inputs can be varied

what happens in the short run?

at least one input is fixed

how do you work out the product of labour (MPL)?

MPL =

what is the marginal product of an input?

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

what does MPL equal?

the slope of the total product curve

what is diminishing returns to an input? 

an increase in the quantity of that input, holding the levels of all other inputs fixed, reduces that input’s marginal product.

what is MPL defined as?

increase in the quantity of output when you increase the quantity of that input by one unit.

definition of a fixed cost?

a cost that does not depend on the quantity of output produced. It is the cost of the fixed input.

definition of a variable cost?

cost that depends on the quantity of output produced. It is the cost of the variable input.

definition of total cost?

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

what is the formula for TC?

FC+ VC

when does the total cost curve become steeper?

as more output is produced, a result of diminishing returns

what happens to the cost when diminishing returns requires more labour as there is more output? 

cost increases

what happens to the total cost curve when output increases?

curve gets steeper due to diminishing returns of labour, because more variable input is needed to increase quantity at each point

Cost is higher

VC: convex shape, because it is increasing at an increasing rate

definition of marginal cost?

the change in total cost generated by one additional unit of output.

change in total cost/ change in quantity

why is the marginal cost curve upwards sloping?

Because there is diminishing returns to inputs. As output increases, the marginal product of variable input declines. This implies that more of the variable input must be used to produce each additional unit of output as the amount of output already produced rises.

ATC formula?

TC/Q

AFC formula?

FC/Q

AVC Formula?

VC/Q

what costs does a firm have to consider when they want to increase output?

has two affects of ATC:

• spreading effect: larger the output = more output over which fixed cost is spread, leading to lower ATC

• diminishing returns effect: larger the output = the more variable input required to produce additional units, which leads to higher ATC

what is the minimum-cost output?

quantity of output at which average total cost is lowest—the bottom of the U-shaped average total cost curve.

what are the 3 principles that are true about a firms MC and ATC?

1. At the minimum-cost output, average total cost is equal to

marginal cost.

2. At output less than the minimum-cost output, marginal cost is

less than average total cost and average total cost is falling.

3. At output greater than the minimum-cost output, marginal cost

is greater than average total cost and average total cost is rising.

why do MC curves slope downwards?

as the output goes from zero up to some low level, and they slope upward at higher levels of production.

The initial downward slope occurs when employing more workers allows them to specialise in various tasks 

Specialisation = increasing returns to hiring of additional workers and results in MC sloping downwards 

what happens in the SR with FC and VC?

at least one input has to be fixed

what happens in the LR with FC and VC?

all inputs are variable and fixed costs may vary

The firm will choose its fixed costs in the LR based on the level of output it expects to produce

what does the long-run ATC curve show?

the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output.

what are increasing returns to scale (economies of scale)?

when long-run average total cost declines as output increases.

When LR input is increased, the output increases more than proportionally

what are decreasing returns to scale (diseconomies of scale)?

when long-run average total cost increases as output increases.

When the LR input is increased, the output increases less than proportionally

when are there constant returns to scale? 

when LR ATC is constant as output increases