Chapter 10 - Production Flashcards
Firms’ Main Objective
Profit Maximization
Short Run
a time frame in which the quantity of one or more resources used in production is fixed. (usually the firm’s capital (or “plant”))
Long Run
a time frame in which all quantities of all resources can be varied
Sunk Cost
a cost incurred by the firm and cannot be changed once it is incurred
How to increase output in the short run
a firm must increase the amount of labour employed
three concepts that describe the relationship between output and the quantity of labour employed
- Total Product
- Marginal Product
- Average Product
Product just means output. DUH.
Total Product
total output produced in a given period
Maringal product
the change in total product that results from a one-unit increase in the quantity of labour employed, with all other inputs remaining the same.
Average product
equal to total product divided by the quantity of labour employed
As quantity of labour employed increases, what happens to total product, marginal product, and average product.
Total Product Increases
Marginal Product Increases initially but eventually decreases.
Average product increases initially but eventually decreases
Law of Diminishing Returns
states that as a firm uses more of a variable input with a given quantity of fixed inputs, the marginals product of the variable input eventually diminishes
Total Cost
the cost of all resources used and can be divided into fixed and variable costs.
Total Fixed Cost
the cost of the firm’s fixed inputs - fixed costs do not change with output
Total Variable Cost
the cost of the firm’s variable inputs - variable costs do change with output.
Marginal cost
the increase in total cost that results from a one-unit increase in total product
