Term
| how are costs related to inputs? |
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Definition
| goods and services cost money to produce because economic resources from which they are produced cost money to purchase |
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Term
| an increase in productivity (more output per unit of input) results in... |
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Definition
| a decrease of cost per unit of output |
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Term
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Definition
| Immediate Run, Short Run, and Long Run |
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Term
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Definition
-shortest time period
-all inputs are fixed
-all costs are fixed
-no production is possible
-price serves only as a rationing mechanism |
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Term
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Definition
-some inputs are fixed (capitial)
-costs associated with the fixed input are fixed
-some inputs are variable (labor)
-costs associated with variable input are variable
-the firm can change output only within the constraints of the existing plant size |
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Term
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Definition
-all inputs are variable
-all costs are variable
-the firm has sufficient time to adjust the size of existing plants, close down plants, or move into new markets |
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Term
| production and cost in the immediate run |
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Definition
| -all costs and outputs are fixed |
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Term
| production and cost in the short run |
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Definition
-fixed and variable inputs and costs
-output can be varied within the constraints of the existing plant capacity |
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Term
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Definition
examines the effects of introducing a change to an existing condition
-ex: what is the effect on a firm's revenues of producing an additional unit of output? (will you have to hire more workers, will increasing output cause you to lose revenue, etc.) |
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Term
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Definition
| a person/firm should engage in an activity if the marginal benefit of that activity exceeds its marginal costs |
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Term
| Example of a marginal decision rule |
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Definition
| a firm should produce an additional unit of ouput only in the revenue generated from the sale of that unit (marginal revenue) is greater than the cost of producing the unit (marginal cost) |
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Term
| The Law of Decreasing/Diminishing Returns |
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Definition
| principle (assumption) that dominates all short run production and cost analyses stating that as a firm uses more a variable factor of production with a given quantity of fixed factors of production, the marginal product of the variable factor eventually decreases |
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Term
| Example of the law of decreasing returns |
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Definition
| employing additional units of labor to haul hay from a field to a barn |
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Term
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Definition
the change in total product (Q) per additional unit of labor (L)
-MP= (change in Q)/(change in L) |
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Term
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Definition
Total product (Q) per unit of labor (L)
AP= Q/L |
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Term
| As labor increases, Marginal product... |
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Definition
| MP increases, reaches a maximum, then decreases (as implied by the law of diminishing returns) |
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Term
| As labor increases, Average Product... |
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Definition
AP increases, reaches a maximum, then decreases
-MP intersects AP the maximum point on the AP curve |
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Term
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Definition
on related marginal and average values, when the marginal value is greater than the average value, it pulls the average value higher. when the marginal average is lower than average value, it pulls the average value down
(ex: the effect of additional (marginal) exams on overall class average) |
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Term
| The Marginal and Average values are equal... |
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Definition
| at the points where the average values are maximized or minimized |
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Term
| When MP rises above AP... |
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Definition
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Term
| When MP falls below AP... |
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Definition
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Term
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Definition
| the maximum point on the AP curve |
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Term
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Definition
-TC assigns costs to the fixed and variable resources
TC= TFC+TVC
ex: FC=500 VC=150 per unit
TC= 500+150x |
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Term
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Definition
the cost of the firm's fixed factors of production--cost of land, capitial, entrepreneurship, etc.
-fixed costs remain constant as the firm's output level increase
ex: depreciation, property taxes, etc. |
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Term
| Total Variable Cost (TVC) |
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Definition
the cost of the firm's variable cost of production (ex: labor)
-VC increases as the firm employs more labor to increase output |
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Term
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Definition
The cost of all the factors of production used by a firm
-TC increases as the firm's output increases
TC=TFC+TVC |
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Term
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Definition
reflect the firm's cost per unit of output
-has two categories: Average Cost and Marginal Cost |
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Term
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Definition
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Term
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Definition
| cost per additional unit of output |
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Term
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Definition
fixed cost per unit of output
-decreases as output expands
AFC= TFC/Q |
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Term
| Average Variable Cost (AVC) |
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Definition
total variable cost per unit of output
-decreases, reaches a minimum, then increases as output expands
AVC= TVC/Q |
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Term
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Definition
total cost per unit of output
-ATC decreases, reaches a minimum, then increases as output expands
ATC= AFC+AVC
or
ATC= TC/Q |
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Term
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Definition
the increase in total cost per additional unit of output
-decreases, reaches min., then increases as output expands
-equals AVC at the min. points on the ATC and AVC curves
MC=(change in TC)/(change in Q) |
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Term
| extension of the MC formula |
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Definition
*change in TC: each production increment requires employment of an additional unit of labor
-therefore, TC=price of labor
*change in Q: increase in output due to additional units of labor
-therefore, Q=MP of Labor
MC= (price of labor)/(MP of labor) |
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Term
| When MP is increasing, MP is... |
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Definition
| decreasing (and vice versa) |
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Term
| MC is minimized at the output level where MP is... |
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Definition
maximized
(the law of decreasing returns dictates the shape of the MC curve) |
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Term
| when MC lies below AVC and ATC... |
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Definition
| AVC and ATC are decreasing |
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Term
| When MC rises above AVC and ATC... |
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Definition
| AVC and ATC are increasing |
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Term
| MC equals AVC and ATC at... |
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Definition
| the minimum points on the ATC and AVC curves |
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Term
| The Law of Decreasing Returns determines... |
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Definition
| the character of the MC curve, and since the level of the MC curve determines the AVC and ATC curves, the law of decreasing returns determines the character of all short run cost curves |
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Term
| Production and cost in the long run |
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Definition
-time period long enough for all input to be variable (so all costs are variable as well)
-firms have enough time to change plant sizes, build new plants, close down old plants, enter/leave industries, etc. |
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Term
| The Long run is seen as... |
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Definition
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Term
| The long run as a planning a period |
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Definition
-assume a firm is contemplating moving into a new line of production
-the board of directors are considering 5 alternative plant sizes
-**once a plant is actually built, the firm is then operating in the short run (so short run cost curves would apply)
-the LR production decision may be though of as a comparison of alternative short run outcomes w/associated short run ATC curves |
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Term
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Definition
in the long run, the firm has the freedom to choose the plant with the lowest cost of production for a given output level
-the firm can eliminate from consideration all plants with a higher unit cost for that output level |
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Term
| When the firm may choose between a number of possible plant sizes as an effort to minimize unit cost... |
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Definition
| the long run average cost (LRAC) curve can be seen as an "envelope" of the short run ATC curves for all possible plant sizes |
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Term
| Increasing the # of plant sizes |
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Definition
as the # of possible plant sizes moves from a relatively small finite # to a theoretically infinite #, the LRAC curve because "smoother" (more continuous)
-the LRAC curve evolves from a discontinuous (really bumpy) curve to a continuous, smooth curve |
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Term
| Ranges of Output on the Long Run Average Cost (LRAC) curve |
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Definition
-Economies of Scale
-Constant Returns to Scale
-Diseconomies of Scale |
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Term
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Definition
Output Range: 0-Q1
-LRAC decreases over the output range
-the firm becomes more efficient as they become larger |
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Term
| Sources of Economies of Scale |
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Definition
-greater opportunity for employee specialization (and managerial specialization)
-greater opportunity for specialization of machinery and sophisticated mass production techniques
-elimination of redundant positions and plant capacity as existing firms merge |
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Term
| Minimum Efficient Scale (MES) |
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Definition
-output level: Q1
-output level where the economies of scale end
-under competitive conditions, a firm with production capacity less than MES cannot expect to survive in the long run |
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Term
| Constant Returns to Scale |
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Definition
Output Range: Q1-Q2
-LRAC remains constant
-the firm becomes neither more nor less efficient as it becomes larger |
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Term
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Definition
Output level: beyond Q2
-LRAC increases as the firm's output level expands
-the firm becomes less efficient as it becomes larger |
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Term
| Sources of Diseconomies of Scale |
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Definition
-greater demands placed on managers
-communication and coordination problems
-inability to adapt to changing market conditions |
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Term
| Relationship between MES and Typical Firm Size |
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Definition
| the shape of an industry's LRAC curve and the location of its MES play a large role in determining the # and sizes of firms in a market |
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Term
| What firm will dominate in an industry with MES at a low output level followed by diseconomies of scale? |
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Definition
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Term
| What firm will dominate in an industry with MES at a high output level? |
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Definition
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Term
| What firm will dominate in an industry with MES at a low output level followed by an extended output range with Constant Returns to Scale? |
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Definition
| both small and large firms |
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Term
| Other factors that explain firm size |
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Definition
-marketing expertise (ex: beer companies' commercials)
-firm goodwill, reputation for quality (ex: Johnson&Johnson, Tylenol, etc.)
-consumer convenience (ex: microsoft, windows, etc.) |
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