Ch. 11 Technology, Production, and Cost Flashcards
Technology
processed used by firms to turn inputs into outputs
Technological Change
change in the ability of a firm to produce a given level of output with a given set of inputs
Short Run
period of time when at least one of a firm’s inputs is fixed
Long Run
period of time when a firm can vary all of its inputs, adopt new technology, and vary its physical plant size
Opportunity Cost
highest-valued alternative that must be given up to engage in an activity
Explicit Cost
cost that involves spending money
Implicit Cost
a non-monetary opportunity cost
Production Function
relationship between inputs employed by a firm and the max output it can produce
Marginal Product of Labor
the additional output a firm produces from hiring one more worker
Law of Diminishing Returns
at some point adding more of a variable input to the same amount of fixed input will cause the marginal product of the variable to decline
Average Product of Labor
total output produced by a firm divided by the quantity of workers
Marginal Cost (MC)
change in a firm’s total cost from producing one more unit of a good/service
Relationship between Marginal Product of Labor and Marginal Cost
- when marginal product of labor rising, marginal cost of output is falling
- when marginal product of labor is falling, marginal cost of output is rising
- this is why graph is U shaped
Average Fixed Cost (AFC)
fixed cost divided by quantity produced
Average Variable Cost (AVC)
variable cost divided by quantity produced
Average Total Cost (ATC)
total cost divided by quantity produced
-is the sum of the average fixed and average variable cost
Relationship of MC and ATC/AVC
-marginal cost intersects average variable and total costs at their minimums
Average Fixed Cost and Quantity Relation
As quantity gets larger, average fixed cost decreases
Average Variable/Total Costs and Quantity
As quantity gets larger avg variable and total costs get closer together due to the decrease in avg fixed cost
Ling-Run Average Cost Curve
shows the lowest cost where firms can produce a given level of quantity output in the long run (with no fixed inputs)
Economies of Scale
when the firm’s long-run average cost falls as it increases the quantity produced
Constant Returns to Scale
situation when a firm’s long-run avg costs remain unchanged with increased quantity output
Minimum Efficient Scale
the level of output where all the economies of scale are exhuasted
Diseconomies of Scale
when a firm’s long-run avg costs rise with increased quantity output
Isoquant
curve that shows all the combinations of two inputs (ex-capital and labor) that will produce the same level of output
-similar to an indifference curve
Marginal Rate of Technical Substitution (MRTS)
rate at which a firm is able to substitute one input for another- keeping the level of output constant
-is the slope of the isoquant
Isocost Line
all the combinations of 2 inputs (ex-capital and labor) that have the same total cost
-similar to a budget constraint
Slope of Isoquant is …
The MRTS (marginal rate of technical substitution)
Slope of the Isocost line is …
ratio of input price on the horizontal axis divided by the input price on the vertical axis
-NOTE: this is backward from typ “rise/run” slope in its wording bc it is in reference to price. Slope is still slope either way (see Pg. 394 for more)
Determinates of the Cost-Minimizing Choice
- Technology Available (rep. by isoquant)
2. Input Prices (rep. by iscost)
