Inputs And Outputs

• 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

Graphing Production

• The Three Stages Of Returns

  1. Increasing Marginal Returns

  2. Decreasing Marginal Returns

  3. Negative Marginal Returns

The “short-run”

• 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

Different Economic Costs

• 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]

The “long-run”

• 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

Returns To Scale

• 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

Average Total Cost (ATC) In The Long Run

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

Economies Of Scale

• 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.