Final - Inputs and Costs Flashcards
Economic Profit
Total Revenue - total costs
3 parts of the TP curve
- q increases at an increasing rate
- q increases at a decreasing rate
- q decreases
Marginal product of variable input
–> Extra output generated by adding one more unit of variable input
Change in quantity produced
——————————-
change in labour
3 parts of the MP curve
- Increasing marginal returns
- Diminishing marginal returns
- MP becomes negative
Law of diminshing returns
As the quantity of one input increases, w the other quantities of inputs held constant, a point is eventually reached at which the MP begins to decline
Why does MP begin to decline?
Law of diminishing marginal returns
–> Specialization will increase efficiency up to a point
Average product of labour
quantity of output
labour
Parts of APL graph
- Efficiency increases
- Efficiency increases decreasingly
- Efficiency decreases
Are APL and MP related?
Yes
- Due to the mathematical relation between them
- If MP is higher than APL, APL will increase and vv
Parts of a AP and MP graph
- MPL > APL –> APL increases
- MPL > APL –> APL increases but MPL is starting to fall
- MPL < APL –> APL decreases
(if MPL = APL, APL stays the same)
Total Costs
TC = FC + VC
Are fixed costs important in the short run?
no, not rlly q
Do the TC and VC curves every meet?
absolutely not
TC is always going to be higher than VC bc of FC
Parts of a TC+VC graph
- TC and VC increase at a decreasing rate
- TC and VC increase at an increasing rate
Short-run marginal costs
change in output
ALSO
Change in VC
——————–
Change in q
Whats the normal shape of the MC? Why?
U-shaped
–> At low output levels, greater specialization and greater use of variables drives down MC
–> but then at some point the law of diminishing returns sets in and MC begins to rise
Why does MC decrease?
Bc MPL increases
Why does MC increase?
Bc MPL decreases
Increases as output increases
What does the min MC and max MPL represent?
the point at which law of diminshing returns kicks in
Short run Average total costs
ATC = VC + FC / q
Why does AFC continously fall?
Spreading effect
What shape is AVC and why?
U-shaped
–> at low input falls bc specialization
–> at high input, law of diminishing returns kicks in
What shape is ATC and why?
U-shaped
–> at low input, AFC and AVC are both falling, and so is ATC
–> at higher input, AFC is falling but AVC may be rising or falling, thus ATC will change accordingly
Where does the MC curve intersect with the ATC and AVC in the short run?
at their minimum
Types of Long-run average costs
- Increasing returns to scale
(LRAC falls as output rises) - Constant returns to scale
(LRATC stays constant as output rises) - Diminishing returns to scale
(LRATC rises as output rises)
At any given output, which cost is greater: SR or LR?
SR (Short run) bc long run costs are more flexible
At minimum cost output, what’s the relationship between AVTC and MC?
Equal
At an output less than the minimum cost output, what’s the relationship between AVTC and MC?
MC < AVTC
AVTC Falling
At an output more than the minimum cost output, what’s the relationship between AVTC and MC?
MC > AVTC
AVTC increasing
