Lecture 7 - Technology, Production, and Costs Flashcards
Technology
The processes a firm uses to turn inputs into outputs
Technological Change
A change in the ability of a firm to produce a given level of output with a fixed quantity of inputs
Short Run
A period of time during which at least one of the firm’s inputs is fixed
What is one factor of production that tends to be fixed in the short run?
Capital
Long run
A period of time during which none of the factors of production are fixed; all inputs free to vary
Variable Costs
Costs that change as output changes
Fixed Costs
The costs that remain constant as output changes
True or False: In the long run, all costs are variable costs
True
Total Cost expression in the short run
TC = Fixed Costs + Variable Costs
Average Total Cost Expression
ATC = AFC + ATC
Average Fixed Cost Expression
FC/Q
Average Variable Cost Expression
VC/Q
Explicit Cost
A cost that involves the direct payment of money
Implicit Cost
A non-monetary opportunity cost
Production Function
Captures the relationship between the inputs employed and the maximum output of the firm
True or False: Total Cost is 0 when quantity is 0
False
True or False: At low levels of production, ATC falls as output increases. At higher levels of production, ATC may rise as output increases.
True
What is the shape of an ATC curve and why?
U-shaped because of the rising-then-falling nature of average total cost
Marginal Product of Labor
the additional output a firm produces as a result of hiring one more worker
Law of Diminishing Returns
At some point, adding more of a variable input to the same amount of a fixed input will cause the marginal product of the variable input to decline
Marginal Cost
the change in a firm’s total cost from producing one more unit of a good or service
What shape is the ATC curve?
U-shaped
What shape is the AVC curve?
U-shaped
Does Marginal cost intersect ATC and AVC. If so, where?
Yes; at their minimum point
Long-run average cost
Shows the lowest cost at which a firm is able to produce a given output in the long run when no inputs are fixed;
Economies of Scale
As output increases, long-run average total cost decreases
Constant Returns To Scale
long-run average total cost remains unchanged as output increases
Minimum Efficient Scale
The lowest level of output at which all economies of scale are exhausted
Diseconomies of Scale
A firm’s long-run average total cost increases as output increases
Why do economies of scale arise? (3)
- Specialization
- Bulk discount (in terms of input prices)
- some products require large-scale production
Why do diseconomies of scale arise? (3)
- firm has to employ factors of production that are less well suited to production
- coordination inefficiencies - at some point, managers may have difficulty coordinating huge operations
- problems devising efficient compensation packages
