Technology, Production, and Costs Summary

Technology Definition

  • Technology: Processes that convert inputs into outputs of goods and services.
  • Technological Change: Improvement in a firm's ability to produce output with the same quantity of inputs.

Short Run vs Long Run

  • Short Run: Time period where at least one input is fixed.
  • Long Run: Time period sufficient to adjust all inputs, adopt new technologies, and modify physical plant size.

Costs of Production

  • Total Cost (TC): Sum of all inputs in production.
  • Fixed Costs (FC): Costs that do not change with output.
  • Variable Costs (VC): Costs that vary with output.
  • Equations:
    • TC = FC + VC
    • Average Total Cost (ATC) = TC / Output

Opportunity Costs

  • Opportunity Cost: Highest-valued alternative given up.
  • Explicit Costs: Monetary costs paid directly.
  • Implicit Costs: Non-monetary opportunity costs.

Production Function

  • Definition: Relationship showing maximum output a firm can produce from various inputs.

Marginal Product of Labour

  • Marginal Product: Additional output from one more worker.
  • Law of Diminishing Returns: Adding more of a variable input eventually leads to decreased marginal output.

Costs Analysis

  • Marginal Cost (MC): Change in total cost from producing one more unit.
  • Average Fixed Cost (AFC): Fixed cost per unit produced.
  • Average Variable Cost (AVC): Variable cost per unit produced.
  • Cost Curves: MC, ATC, and AVC typically U-shaped; MC intersects ATC and AVC at their minimum points.

Long-Run Costs

  • Long-Run Average Cost Curve: Shows lowest cost to produce a given quantity without fixed inputs.
  • Economies of Scale: Cost decreases as production scales up.
  • Constant Returns to Scale: Average costs remain stable with increased production.
  • Diseconomies of Scale: Average costs rise as production increases.

Summary of Key Terms

  • Total Cost (TC): Cost of all inputs.
  • Fixed Costs (FC): Constant costs.
  • Variable Costs (VC): Change with output.
  • Marginal Cost (MC): Extra cost for one additional unit.
  • Average Total Cost (ATC): TC per unit.
  • Average Fixed Cost (AFC): FC per unit.
  • Average Variable Cost (AVC): VC per unit.
  • Implicit Cost: Non-monetary opportunity cost.
  • Explicit Cost: Direct spending costs.