The Short Run Decision
time frame is which quantity of one or more resources used in production is fixed
capital (firms plant) is fixed in short run
other resources (labor, raw materials + enegry) can be changes
short run decisions are easily reversed
the long run
quantities of all resources can be changed, not easily reversed
sunk cost
cost incurred by the firm and cannot be changes, irrelevant to firms decision, cost of buying a plant that has no resale value
short run technology contestant
to increase short run output firm must increase the amount of labor employed
3 concepts that describe the relationship between output and quantity labored employed
1. total product - total output produced in given period
2. marginal product- labor is the change in total product that results from one unit increase in the quantity of labor employed, all other inputs remain the same
3. average product - labor equal to
product curve
graph of total product marginal product and average product that show how total product, and average product change as quantity of labor employed changes
shows how total product changes with quantity of labor employed
the total product curve is similar to
short run technology constraint
when marginal product of a worker exceeds the marginal product of previous worker the marginal product of marginal product of labor increases and firm experiences increasing marginal returns
law of diminishing returns
states that as a firm uses more of variable input with a given quantity of fixed inputs, the marginal product of the variable input eventually diminishes.
average product curve
when marginal product exceeds average product, average product increases
when marginal product is below average product decreases
when marginal product equals average product, average product is at max
short run cost
to produce more output in the short run, the firm must employ more labor, which means that it must increase costs
3 concepts and 3 types of cost curves
total cost, marginal cost, average cost
total cost
cost of all resources uses
total fixed cost
cost of firms fixed inputs
total variable cost
cost of the firms variable inputs variable costs fo not change with output
TC=TFC+TVC
total cost equation
total variable cost curve becomes less
steep at low output levels
marginal cost
increases in total cost that results from one unit increases in total product
over the output range with increasing marginal returns marginal cost falls as output increases
average fixed cost
total fixed cost/unit of output
average variable cost
total variable cost per unit of output
average total cost
cost per unit of output
average cost equation
ATC = AFC + AVC
AFC shpws that average fixed cost falls as
output increases
AVC is U shaped, as output increases avage variable cost falls to minimun then increases
true
where AVC falls,
MC is below average
where AVC is rising
MC above AVC
minimum AVC
MC=AVC
ATC failling
MC below ATC
where ATC is rising,
MC is above ATC
at minimum ATC
MC=ATC
why is the average total cost curve a U shape
intitally marginal product exceeds average product, which brings rising average product fall AVC
eventually marginal product falls below average product, which brins falling average product, which brings falling average procut and rising ATC
cost curve and product curves
cost cruves determined by technology use
minimum efficient scale
the smallest quantity of output at which the scurve reaches its lowest level
short run
the period of time in which the quantity of at least one factor of production is fixed and the quantities of the other factors can be varied. the fixed factor is usually capital that is the firm has a given plant size.
diminishing marginal returns
the tendency for the marginal product of an additional unit of a factor of production is less than the marginal product of the pervious unit of the factor
long run average cost curve
the relationship between the lowest attainable average total cost and output when both plant size and labor are varied
marginal product
the increase in total product that results from a one unit increase in the variable input, with all other inputs remaining the same, it is calculates as the increase in total product divided by the increase in the variable input employed, when the quantit
economies of scale
features of a firms technology that lead to a falling long run average cost as out put increases
total product
the total output produced by a firm in a given period of time
average product
the average product of a factor, it equals total product divided by the quantity of the factor employed
diseconomies of scales
features of a firms technology that lead to rising long run average cost as output increases
constant returns to scale
features a firms technology that lead to constant long run average cost as output increases, when constant returns to scale are present, the LRAC curve is horizontal
The increase in total product that results from a one-unit increase in the quantity of labor employed with all other inputs remaining the same is the
marginal product.
When Pizza Palace employs 6 workers, it can produce 30 pizzas. When Pizza Palace employs 7 workers, it can produce 42 pizzas. The marginal product of the 7th worker is ____ pizzas.
42
Diminishing marginal returns occur when the marginal product of an additional worker is
less than the marginal product of the previous worker.
When the marginal product of labor is less than the average product of labor, then if an additional worker is hired, the average product
falls.
Average fixed cost:
continually declines with increasing output.
Because of diminishing marginal returns, eventually the ____ increases as production increases.
marginal cost
When Tio's Tacos produces 100 tacos an hour, the total cost is $500. When Tio's Tacos produces 101 tacos an hour, the total cost is $501. The marginal cost of the 101st taco is
$1.00.
A firm's short-run total cost curve shifts downward if the cost of a fixed factor of production ____ or the cost of a variable factor of production ____.
decreases; decreases
In the long run,
all factors of production are variable.
Features of a firm's technology that lead to falling long-run average cost as output increases are
economies of scale.
a firms goal is to maximize its
profit
which of the following is an opportunity cost of oppuopperating a business
-the wage paid to the workers
- the salary paid to the owners
- the interest not earned on funds used to buy capital equitment
the implict rental rate of capital includes the ___ and the ____
economic depreciation; forgone intrest
a normal profit is
not the same as companys economic profit
Which of the following constraits limits a firms profit
-technology contraisnts
- information constraints
- market constraints
the method of organizing production that uses marginal hierarchy is
a command system
the possibility that an employee might not work hard is an example of
principal agent problem
most firms are
proprietorships
a form of business that is simple to set up, whose profits are taxed only once and is run by a single owner is
proprietorship
a disadvantage of the corporate form of business organization is its
tax liability because retained profits are taxed twice
What type of industry structure has many firms, each producing a slightly differen good, with no barriers or entry or exit
monopolisitc competition
the four firm concentration ratio measures the share of the largest four firms in the industry
sales