Inputs and Costs Flashcards
Production in the Short Run
Turning inputs into outputs = production
In short run, one (at least) input is fixed and cannot be varied
Production Function
Production function represents relationship between quantity of inputs a firm uses and the quantity of output it produces
As inputs increases so does output until it eventually stagnates
Fixed v. Variable Inputs
Fixed:
Cannot be varied in short run (ex: machinery)
Variable:
Can change at any time, all inputs are variable in long run (ex: labor)
Long Run v. Short Run
Long:
- All inputs variable
Short:
- At least one fixed
Total Product Curve
How quantity of output depends on quantity of variable input, keeping the fixed input constant
(see graph) marginal product of inputs changes along the TP curve, sometimes increases by 17, sometimes by less/more
Marginal Product of Labor (MPL)
Additional quantity of output produced by using one more unit of labor
Additions decrease to diminishing returns
Fixed and Variable Costs
Fixed costs do not depend on quantity of output (ex: rent)
Variable costs vary with level of output (ex: raw materials)
Total Cost Curve
Represents sum of fixed and variable costs at different levels of output
Increases exponentially
Marginal Cost (MC)
Change in total cost generated by producing additional unit of output
Increases linear
Average Costs
Average total cost (ATC): total cost/quantity of output
Average fixed cost (AFC): fixed costs/quantity of output
Average variable cost (AVC): variable costs/quantity of output
ATC graph: decreases initially (economies of scale better specialization, more efficient use of inputs), reaches a minimum point (firm uses fixed and variable costs most efficiently) and then increases (diminishing returns)
AFC graph: decreases in decreasing rate, fixed costs less noticeable as output increases
AVC graph: same shape as ATC but lower because it is not adding AFC
Short-Run vs. Long-Run Costs
Long run, where all inputs can vary, allows firms to optimize costs
