Chapter 11: Behind the Supply Curve: Inputs and Costs Flashcards
Production Function
relationship between the quantity of inputs a firm uses and the quantity of output if produces
Fixed Input
an input whose quantity is fixed
Variable Input
input whose quantity can vary at any time
- ex/ workers
- ex/ in long run firms can adjust quantity of any input
Total Product Curve
shows how quantity of output depends on the quantity of the variable input for a given quantity of of the fixed input
Marginal Product
the additional quantity of output that is produced by one more unit of input.
-change in Q/ change in input
Diminishing Returns to an Input
when an increase in the quantity of that input leads to a decline in the marginal product of that output
Diminishing returns
only true if quantity of all other inputs is fixed
Fixed Cost
cost that does not depend on the quantity of an output produced. Cost of the fixed input
Variable Cost
cost that depends on the quantity of output produced. cost of the variable input.
Total Cost
sum of the fixed cost and the variable cost of producing that quantity of ouput
TC = FC + VC
Total Cost Curve
curve that shows how total cost depends on the quantity of that output
-upward sloping, gets steeper as it goes up
Marginal Cost
change in total cost/ change in quantity of output
-slope of the total cost curve
Average Total Cost (ATC)
TC/Q
- tells producer how much average “typical unit” of output costs to produce
- sum of AFC and AVC
Average Fixed Cost (AFC)
FC/Q
Average Variable Cost (AVC)
VC/Q
Spreading Effect
the larger the output, the greater the quantity of output over which fixed cost is spread, leading to lower AFC
-more powerful at low levels of input
Diminishing Returns Effect
The larger the output, the greater the amount of variable input required to produce additional units leading to higher AVC
-more powerful at higher levels of output–> outweighs spreading effect
Minimum-cost output
quantity of output at which total cost is lowest–> bottom of the “V”
- At this point:
- ATC = MC
- At output less than, MC < TC and ATC is falling
- At output greater than, MC>TC and ATC is rising
Short-Run vs. Long-run
- in long run –> fixed cost becomes variable firm can choose
- at any level of output –> tradeoff between lower FC and higher VC and vice versa
- in long-run –> higher FC leads to lower ATC and vice versa
- at levels decisions to be made
- -> take in the tradeoffs
Long-Run Average Total Cost Curve
shows relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output
-how firms make decisions
Increasing Returns to scale
when long-run average TC declines as output increases
-often due to specialization or technology
Decreasing Returns to scale
when long-run average TC increases as output increases
