Chapter 11 Flashcards
Characteristics of the “short run”
- Quantity of one or more resources is fixed.
- The capital is fixed.
- Resources (labour, raw materials and energy) are variable
- Decisions are easily reversed.
Characteristics of the “long run”
- Quantities of all resources can vary
- Decisions are not easily reversed.
Sunk Cost
A cost incurred by the firm that cannot be changed.
- Irrelevant to current decisions.
3 Concepts that describe the relationship between Quantity output and Labour
Total Production: The maximum output that a given quantity of labour can produce.
AP = TP / L MP = ∆TP / ∆L
Marginal product
The change in total product that results from a one-unit increase in the quantity of labour employed. (all other inputs remaining the same).
MP = ∆Q / ∆L = ∆TP / ∆L
Law of diminishing returns
As a firm uses more of a variable input with a given quantity of fixed inputs,
the marginal of the variable input eventually diminishes.
Total cost
cost of all resources used
Total fixed cost
the cost of the firm’s fixed inputs
Total variable cost
the cost of the firms variable inputs
Average fixed cost (AFC)
the total fixed cost per unit of output.
Average variable cost
the total variable cost per unit of output.
Average total cost
the total cost per unit of output.
Marginal cost
the increase in total cost that results from a one-unit increase in total product
formula for marginal cost (MC)
MC = ∆TC / ∆Q
Why are MC-curves U-shaped?
Over the output range, with increasing marginal returns, MC falls as Q increases.
Over the output range with diminishing marginal returns, marginal cost rises as output increases.
Why are ATC & AVC curves U-shaped
Initially, MP > AP
»> rising AP and falling AVC
- Eventually, marginal product falls below average product, which brings falling average product and rising AVC.
- ATC is U-shaped for the same reasons and in addition ATC falls at low output levels because AFC is falling steeply.
The production function
The behaviour of long-run cost depends upon the firm’s production function, which is the relationship between the maximum output attainable and the quantities of both capital and labour.
Long run average cost curve (LRAC)
The relationship between the lowest attainable average total cost and output when both the plant size and labour are varied.
The LRAC is a planning curve that tells the firm the plant size that minimizes the cost of producing a given output range.
Economies of scale
Features of a firm’s technology that lead to falling LRAC as Q increases.
Diseconomies of scale
Features of a firm’s technology that lead to rising LRAC as Q increases.
Constant returns to scale
Features of a firm’s technology that lead to constant LRAC as Q increases.
Minimum efficient scale
the smalles quantity of output at which the LRAC reaches its lowest level.
