AP microeconomics

The Production function is the relationship between the quantity of input a firm uses and the quantity of output it produces.

A Fixed input whose quantity is fixed for a period of time and cannot be varied.

A Variable input is an input whose quantity can vary at any time. 

The Long Run is the time period in which all inputs can be varied. 

The Short Run is the time period in which at least one input is fixed.

The Total product curve shows how the quantity of output depends on the quantity of the variable input for a given quantity of the fixed input.

The marginal product of an input is the additional quantity of output that is produced by using one more unit of that input

The Marginal product of labor = Change in quantity of output divided by change in quantity of labor. Which is also, change in quantity of output generated by one additional unit of labor 

MPL = Change in quantity divided by change in labor

There are diminishing returns to an input when an increase in the quantity of that input, hoarding the levels of all other inputs, is fixed, least to a decline in the marginal product of that input. 

A fixed cost is a cost that does not depend on the quantity of output produced 

A fixed cost is the cost of the fixed input.

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

A variable cost is the cost of the variable input. 

Variable cost + fixed cost = total cost. 

The total cost of producing a given quantity of output is the sum of the fixed cost and the variable cost of producing that quantity of output.

Total cost = Fixed cost + variable cost.

The Total cost curve becomes steeper as more output is produced due to diminishing returns. 

Marginal cost = change in total cost divided by change in quantity of output. Which means the change in total cost generated by an additional unit of output

Marginal cost = Average total cost divided by change in quantity. 

As in the case of marginal product

Marginal cost is equal to the “rise”(the increase in total cost) divided by “run” ( the increase in the quantity of output)  

Why is the marginal cost curve upward sloping? Because there are diminishing returns to inputs in this example. As _____ inputs, the marginal product of the variable input declines. 

Variable fixed cost is the fixed cost per unit of output

This implies that more and more of the variable input must be to produce each additional unit of output as the amount of output already produced. 

And since each unit of the variable input must be paid for, the cost per additional unit of output also rises.

Average total cost, often referred to simply as average cost, is total cost divided by quantity of output product.

A U-Shaped average total cost curve focuses at low levels of output, the U rises at higher levels.

ATC = Total cost divided by quantity of output.

AFC = Fixed cost divided by quantity of output.

Average variable cost is the variable cost per unit of output. 

Average variable cost = variable cost divided by quantity. 

Increasing output has two opposing effects on average cost. 

The spreading effect: the longer the output is, the greater the quantity of output over which fixed cost is spreading, leading to the average fixed cost. 

The diminishing returns effect: the larger the output, the greater the amount of variable input required to produce additional units, leading to higher average variable cost. 

Marginal cost is upward sloping due to diminishing returns

Average variable cost is also upward sloping but is flatter than the marginal cost curve.

Average fixed cost is downward sloping because of the spreading effect.

The marginal cost curve intersects the average total cost curve from below, crossing at its lowest point. 

The minimum cost output is the quantity of output at which average total cost is lowest. The bottom of the u-shaped average total cost curve. 

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

At output less than minimum-cost output, marginal cost is less than average total cost and average total cost is falling.

And at output greater than the minimum cost output, marginal cost is greater than average total cost and average total cost is rising. 

In practice, marginal cost curves often slope downward as a firm increases its production from zero up to some low level.

This initial downward slope occurs because a firm that employs only a few workers often cannot reap the benefits of specialization of labor. 

This specialization of labor can lead to increasing returns at first, and so to a downward sloping marginal cost curve. 

Once there are enough workers to permit specialization, however, diminishing returns set in. 

In the short run, fixed cost is completely outside the control of a firm

But all inputs are variable in the long run: this means that in the long run, fixed cost may also be varied. 

In the long run, in other words, a firm's fixed cost becomes a variable it can choose. 

The firm will choose its fixed cost in the long run based on the level of output it expects to produce. 

The long run average total cost curve shows the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output

A firm may choose to increase their fixed cost, in order to increase output.

Over using space can cause supply issues so firms expand which increases their total fixed cost but may actually decrease their average total cost. 

There are increasing returns to scale ( economics of scale) when long-run average total cost declines as output increases. 

There are decreasing returns to scale (diseconomies of scale) when long-run average total cost increases as output increases. 

There are constant returns to scale when long-run average total cost is constant as output. 

A sunk cost is a cost that has already been incurred and is non-recoverable. A sunk cost should be ignored in decisions about future actions. 

Sunk cost should be ignored in making decisions about future actions. Because they have already been incurred and are non-recoverable, they have no effect on future costs and benefits. 

“There’s no use crying over spilled Milk” this phrase is a metaphor for a sunk cost.

There is a significant difference in total cost from making different choices about fixed costs. 

In many instances a firm can choose among a number of alternate combinations of inputs that will produce a given level of output. 

The firm could choose a capital - intensive operation by hiring more labor than capital.

The concept  of complements and substitutes applies to a firm’s purchase of inputs.

Substitute inputs can be used in place of each other.

Complement ideas exists when one input increases the productivity of the other. 

How do you decide what combinations of inputs to use if the combinations provide the same amount of outputs? 

Find the combination of inputs that cost the least - The cost-minimizing input combinations. 

The results from hiring an additional unit of an input is the marginal product(MP) of that input.

Firms want the highest possible marginal product from each dollar spent on inputs. 

Firms adjust their hiring of inputs until the marginal product per dollar is equal for all inputs

Marginal product of labor divided by wage = marginal product of kapital(capital)  divided by rented rate equals marginal product of land over rate. 

If MPL/wage is greater than MPK(marginal product of capital) then the firm could move $1 from hiring ___ to hiring labor and get more output from it.

The firm will continue to substitute labor for capital until the falling marginal product of labor per dollar meets the rising marginal product of capital per dollar.