Chapter 12 (3)

Question 1

Costs

Answer 1

the flip side of production

–> When a firm increases its output by adjusting its use of inputs, it incurs the costs associated with that decision. (the cost of inputs?)

–> In general, the cost of an input won’t decrease simply b/c you’ve reached the point of diminishing marginal product in your firm

Question 2

Fixed Costs (do you still have to consider it?)

Answer 2

fixed costs = have to be paid –>regardless of how many pizzas you produce

–> Pizza production (output) = depends only on your variable costs–the cost of labour

Question 3

Average fixed cost (AFC) EQ

Answer 3

(𝑭𝒊𝒙𝒆𝒅 𝒄𝒐𝒔𝒕)/𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚

Question 4

Average variable cost (AVC)

Answer 4

(𝑽𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝒄𝒐𝒔𝒕)/𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚

Question 5

Average total cost (ATC)

Answer 5

(𝑻𝒐𝒕𝒂𝒍 𝒄𝒐𝒔𝒕𝒔)/𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 = AFC + AVC

Question 6

Marginal cost (MC)

Answer 6

(𝜟 𝒕𝒐𝒕𝒂𝒍 𝒄𝒐𝒔𝒕)/(𝜟 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚)

Question 7

Average Fixed Cost Curves

Answer 7

trends downward.

–> Fixed costs remain the same as quantity produced increases

–>so the FC per unit of production decreases (b/c it still continuously increasing)

–>Same cost spread out over more units of output.

Question 8

Average Variable Cost Curves

Answer 8

is U-shaped

–>It initially slopes downward as the first few employees = have increasing marginal product

–> As the principle of diminishing marginal product kicks in –> it trends upwards

Question 9

Average Total Cost Curve

Answer 9

U-shaped

–>Though less noticeably so than the AVC curve

–> Reason = that increases in AVC are, for a while –> cancelled out by decreases in AFC

Question 10

MARGINAL COST

Answer 10

another way to decide how many workers to employ = to look at marginal cost

–>Because firms make decisions on the margin –> they can ask what ADDITIONAL COST they will incur by producing one additional unit of output

–>Aka the marginal cost (MC) of that unit

Question 11

Marginal Cost (MC) EQ

Answer 11

(𝜟 𝒕𝒐𝒕𝒂𝒍 𝒄𝒐𝒔𝒕)/(𝜟 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚)

Question 12

MARGINAL COST CURVES

Answer 12

The MC curve is U-shaped and is the inverse shape of the marginal product curve

–>Every additional unit of input costs the same, regardless of its contribution to production.

–>Marginal cost = initially decreases (as marginal product increases) and then increases (as marginal product decreases)

Question 13

MARGINAL AND AVERAGE COST CURVES

Answer 13

plotting them both on the same graph –> in which the relationship between marginal and average total cost can be established visually

–> Notice that the MC curve = intersects the lowest point of the ATC curve

—–> When the MC of producing another unit is less than the ATC, producing an extra unit decreases the ATC.

——>When the marginal cost of producing another unit is more than the ATC, producing an extra unit will increase the ATC.

–>The concepts of marginal & average total cost = fundamentally important to decisions about production

Question 14

PRODUCTION IN THE SHORT RUN & THE LONG RUN

Answer 14

> the differences between the costs that firms place in the short run & long run reflect this need for production adjustment.

Question 15

COSTS IN THE LONG RUN

Answer 15

which costs = fixed depends on what timescale you’re thinking in.

–> Example leases –> if firm decides to make fewer pizzas this month –> it is still committed to pay the monthly cost of its lease

–> When the lease expires –> the firm could decide to move to smaller, cheaper premises
Therefore –> the cost of the lease is fixed in the SHORT RUN, but not fixed in the long run

–> Basically, the long-run is the time required for a firm to vary all of its costs, if so desired.

Question 16

How long is the long run?

Answer 16

Economists don’t think of the long run as being a certain # of days or months or years

–> Instead it refers to however long it would take for a firm to vary all of its costs, if it wanted to

–> Therefore, it depends on the type of firm + type of production

Question 17

RETURNS TO SCALE

Answer 17

describes the relationship between the quantity of output & average total cost

Question 18

economics of scale

Answer 18

initially, a small firm = may find that operating on a larger scale enables it to lower its average cost

–> Example: if you own ten pizza places rather than one –> you may be able to negotiate bulk-purchase discounts on ingredients

Question 19

DISECONOMIES OF SCALE

Answer 19

when increasing a firm’s scale starts to raise its average costs

–>however, bigger isn’t = always better

–> There may come a point at which increasing scale leads to higher average costs

–> Imagine running a chain of tens of thousands of pizza places –> spread across dozens of countries

–> Might be a logistical nightmare to keep the spending under control that your average costs = would be higher than when you had fewer outlets in fewer countries

Question 20

CONSTANT RETURNS TO SCALE

Answer 20

in between these extremes –> there may also be various scales at which a firm can operate w/out experiencing higher or lower average costs

Question 21

Achieving economies of scale by expanding (long-run ATC)

Answer 21

its long-run ATC curve slopes down

–> This shows that ATC decreases as output increases (b/c saving?)

Question 22

Firm would face diseconomies of scale by expanding

Answer 22

the curve slopes up

–>This shows that ATC increases as output increases (more costs incurred?)

Question 23

long-run ATC CURVE (Economies/Diseconomies)

Answer 23

The long-run ATC curve = often shown w/ a flat portion in the middle

–>That flat portion represents the various different levels of output at which the firm achieves constant returns to scale

Question 24

LONG-RUN ATC

Answer 24

firm’s long-run ATC curve = covers a much greater range of output than its short-run ATC curve

Question 25

Long-Run ATC (in the short run)

Answer 25

all firms are stuck on a smaller cost curve

–> they are constrained by the limited capacity of their fixed inputs

Question 26

Long-Run ATC (in the long run)

Answer 26

can be thought of as consisting of points on various sizes –> operating at different scales

Question 27

by increasing / decreasing its scale

Answer 27

a firm can move along the long-run ATC curve from one short-run ATC curve to another

–> Effectively, when a firm moves along the long-run cost curve –> it does so by choosing to move to the short-run cost curve that would be associated w/ a larger or smaller firm

Question 28

EFFICIENT SCALE

Answer 28

when a firm cannot lower its average cost by either increasing / decreasing its scale

Question 29

large economies of scale

Answer 29

At that scale –> it is producing the quantity of output at which average total cost is minimized

–> By this, they mean that some characteristic of that industry = gives an advantage to larger firms