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