Technology, Production, and Costs Summary
Technology, Production, and Costs
Technology
- Definition: The processes a firm uses to convert inputs into outputs of goods and services.
- Technological Change: Alteration in a firm's ability to produce output with a given quantity of inputs.
Short Run vs. Long Run
- Short Run: Time period when at least one firm's input is fixed.
- Long Run: Sufficient time for a firm to adjust all inputs and adopt new technology.
Costs
- Total Cost (TC): Sum of all input costs in production.
- Variable Costs (VC): Costs that vary with output quantity.
- Fixed Costs (FC): Costs that remain constant regardless of output.
Equations:
- Total Cost: TC = FC + VC
- Average Total Cost (ATC): ATC = TC/Q
Explicit vs. Implicit Costs
- Opportunity Cost: Next best alternative forfeited.
- Explicit Costs: Direct monetary expenditures.
- Implicit Costs: Non-monetary opportunity costs.
Production Function
- Describes the relationship between inputs and maximum output achievable.
Example from Julie Johnson's Cost Structure:
- Total Costs: $161,000 includes explicit and implicit costs.
Marginal Product of Labour
- Definition: Additional output from hiring one more worker.
- Law of Diminishing Returns: Adding more variable inputs (like labor) will eventually yield lower per-unit returns.
Marginal Cost (MC)
- Change in total cost from producing one more unit.
Average Costs
- Average Fixed Cost (AFC): FC/Q
- Average Variable Cost (AVC): VC/Q
- Average Total Cost (ATC): TC/Q
Cost Relationships
- MC, ATC, AVC: All U-shaped curves; MC intersects ATC and AVC at their minimum points.
- Economies of Scale: Reductions in per-unit costs as output increases.
- Diseconomies of Scale: Increases in per-unit costs as output increases.
Long-Run Cost Considerations
- Long-run Average Cost Curve: Shows lowest costs for producing various output levels when no inputs are fixed.
- Minimum Efficient Scale: Output level where all economies of scale are realized.
Summary of Definitions
| Term | Definition | Equations |
|---|
| Total Cost (TC) | Cost of all inputs in production | |
| Fixed Costs (FC) | Costs that remain constant | |
| Variable Costs (VC) | Costs that change with output | |
| Marginal Cost (MC) | Cost of producing one more unit | MC = ΔTC/ΔQ |
| Average Total Cost | Total cost per unit of output | ATC = TC/Q |
| Average Fixed Cost | Fixed cost per unit of output | AFC = FC/Q |
| Average Variable Cost | Variable cost per unit of output | AVC = VC/Q |
| Implicit Cost | Non-monetary opportunity cost | |
| Explicit Cost | Monetary expenditure | |