3.1: Production Function and Costs

Production: Converting Inputs Into Output
To Earn Profit, Firms Must Make Products (output)
Input (aka factor): A Resource Used To Make Output
- Ours Will Always Be Workers In Today’s Examples
Total Physical Product (TP): Total Output Or Quantity Produced
Marginal Product (MP): The Additional Output Generated By Additional Inputs (workers)
- Marginal Product = [change In Total Product]/[change In Inputs]
Average Product (AP): The Output Per Unit Of Input
- Average Product = [total Product]/[units Of Labor]

Fixed Vs Variable

Fixed Resource: A Resource That Doesn’t Change With The Quantity Produced
- Eg. Tables, Scissors, Staplers
Variable Resource: A Resource That Does Change With The Quantity Produced
- Eg. Workers, Papers, Staples
Law Of Diminishing Marginal Returns: As Variable Resources (workers) Are Added To Fixed Resources (ovens, Machinery, Tools, Etc.), The Additional Output Produced From Each Additional Worker Will Eventually Fall

The Three Stages Of Returns
1. Increasing Marginal Returns
2. Decreasing Marginal Returns
3. Negative Marginal Returns

Not A Specific Amount Of Time
Short-run: The Period In Which At Least One Resource Is Fixed
- Eg. Capacity/size Is Not Changeable
Long-run: The Period In Which All Resources Are Variable
- No Fixed Resources
- Eg. Capacity/size Is Changeable

Total Costs
- FC: Total Fixed Costs
- VC: Total Variable Costs
- TC: Total Costs
Per Unit Costs
- AFC: Average Fixed Costs
- AVC: Average Variable Costs
- ATC: Average Total Costs
- MC: Marginal Cost
Fixed Cost: The Cost For Fixed Resources That Don’t Change With The Amount Produced
- Eg. Rent, Insurance, Salaries
- Average Fixed Cost = [fixed Cost]/[quantity]
Variable Cost: The Cost For Variable Resources That Do Change With The Amount Produced
- Eg. Raw Materials, Labor, Electricity
- Average Variable Cost = [variable Cost]/[quantity]
Total Cost: The Sum Of Fixed And Variable Costs
- Average Total Cost = [total Cost]/[quantity]
Marginal Cost: The Additional Costs Of An Additional Output
- Eg. If The Production Of Two More Units Of Output Increases Total Cost From $100 To $120, The Marginal Cost Is $10
- Marginal Cost = [change In Total Costs]/[change In Quantity]

Not A Specific Amount Of Time
Short-run: The Period In Which At Least One Resource Is Fixed
- Eg. Capacity/size Is Not Changeable
Long-run: The Period In Which All Resources Are Variable
- No Fixed Resources
- Eg. Capacity/size Is Changeable
- Used For Planning So That Firms Can Identify Which Size Factory Results In The Lowest Per-unit Cost

Three Things That Can Occur To Input
1. increasing Returns To Scale — Output More Than Doubles
2. constant Returns To Scale — Output Exactly Doubles
  1. The Long-run Average Total Cost Is As Low As It Can Get
3. decreasing Returns To Scale — Output Less Than Doubles
“returns To Scale” Only Looks At Production, Not Costs

The Long Run ATC Curve Is Made Up Of All The Different Short Run ATC Curves Of Various Plant Sizes

Firms That Produce More Can Better Use mass Production Techniques And specialization
- Eg. A Car Company That Makes 50 Cars Will Have A Very High Average Cost Per Car
- A Car Company That Can Produce 100,000 Cars Will Have A Low Average Cost Per Car
- Using Mass Production Techniques, Like Robots, Will Cause Total Cost To Be Higher But The Average Cost For Each Car Will Be Significantly Lower
Long-run Average Cost Falls Because Mass Production Techniques Are Used
diseconomies Of Scale: Long-run Average Costs Increase As The Firm Becomes Too Large And Difficult To Manage [decreasing Returns To Scale]
Big Idea — The Law Of Diminishing Marginal Returns Doesn’t Apply In The Long Run Because There Are No Fixed Resources.