Microeconomics

short run

the period of time during which at least one of the firms inputs are fixed.
ex: firms technology or size of plant are both fixed, while the number of workers the firm hires is variable

long run

the period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant

total cost

the cost of all the inputs a firm uses in production
= fixed cost + variable cost

variable costs

cost that change as outputs changes
ex: labor cost

fixed costs

cost that remain constant as output changes
ex:lease payments, insurance

explicit cost

a cost that involves spending money
aka accounting costs

implicit cost

a non-monetary opportunity cost

economic cost

both accounting costs and implicit costs

production function

the relationship between the inputs employed by a firm and the maximum output it can produce with those inputs

average total cost

total cost
_______________
quantity of output produced

marginal product of labor

the additional output a firm produces as a result of hiring one more worker

law of diminishing returns

at some point, adding more of a variable input (ex. labor) to the same amount of a fixed input (ex. capital) will cause the marginal product of the variable input to decline

average product of labor

total output produced by a firm
________________________________
quantity of workers

marginal cost

the change in a firms total cost from producing one more unit of good or service
= change in total cost
________________________
change in quantity produced

when the marginal product of labor is rising

the marginal cost of output is falling

when the marginal product of labor is falling

the marginal cost of production is rising

the average product of labor is the average of

the marginal products of labor

whenever the marginal product of labor is greater than the average product of labor

the average product of labor must be increasing
ex: GPA

marginal cost is below average total cost

average total cost falls

marginal cost is above average total cost

average total cost rises

marginal cost = average total cost

when average total cost is at its lowest point

average total cost

total cost
____________________________
quantity of output produced
=average fixed cost + average variable cost

average fixed cost

fixed cost
______________________________
quantity of output produced

average variable cost

variable cost
_____________________________
quantity of output produced

marginal cost, average total cost, average variable cost are all shaped

U-shaped

marginal cost curve intersects

the average variable cost and the average total cost curves at their minimum points

as output increases, average fixed cost

gets smaller and smaller

as output increases, the difference between average total cost and average variable cost

decreases
this happens because the diff between average total cost and average variable cost is average fixed cost, which gets smaller as output increases.

in the long run, all costs are

variable.
there are no fixed costs

in the long run, total cost =

variable cost

long run average cost curve

a curve showing the lowest cost at which a firm is able to produce a given quantity or output in the long run

economies of scale

when a firm's long-run average costs fall as it increases output

firms may experience economies of scale because 1.

technology may make it possible to increase production with a smaller proportional increase in at least one input

firms may experience economies of scale because 2.

both workers and managers can become more specialized, enabling them to become more productive as output expands

firms may experience economies of scale because 3.

larger firms maybe be able to purchase inputs at lower cost than smaller competitors

firms may experience economies of scale because 4.

as a firm expands, it mat be able to borrow money at a lower interest rate, thereby lowering its costs

constant returns to scale

when a firm's long run average costs remain unchanged as it increases output

minimum efficient scale

the level of output at which all economies of scale are exhausted

diseconomies of scale

when a firm's long run average costs rise as the firm increases output

technology

the process of using inputs to make outputs

technology change

when a firm is able to produce the same output using fewer inputs

technology includes

operations such as
skill of its managers
speed of its machinery

law of diminishing returns does not apply to

the long run