Output and Costs Flashcards
What are decision time frames?
They affect how reversible/irreversible a decision is
What are short run decisions?
A time frame in which the quantity of at least one factor of production is fixed, the fixed FOPs are the firm’s plant - this is fixed in the short run
How can firms increase output in the short run?
A firm must increase the quantity of a variable FOP which is usually labour
How reversible/irreversible are short run decisions?
They are easily reversed as the firm can increase/decrease output through varying the amount of labour it hires
What are long run decisions?
The long run is a time frame in which the quantities of all FOPs can be varied. The firm can change its plan.
How can firms increase output in the long run?
A firm can change its plant as well as the quantity of labour
How reversible/irreversible are long run decisions?
Long run decisions are not easily reversed, the decisions have to stick for a period of time.
Which costs do and don’t influence a firm’s decisions?
The short run costs of changing labour inputs and the short run costs of changing plants are the only ones that influence decisions. Sunk costs do not
What are sunk costs?
Past expenditure on plant that has no resale value is a sunk cost. They are irrelevant to current decisions.
What are product schedules?
Total product, marginal product and average product
What is total product?
The maximum output that a given quantity of labour can produce
What is the marginal product of labour?
The increase in total product that results from a one unit increase in the quantity of labour employed, with all other inputs remaining the same
What is average product?
It tells us how productive workers are on average. The average product of labour is equal to total product divided by the quantity of labour employed.
What are product curves?
Graphs of the relationship between employment and the three product concepts. They show how TP, MP and AP change as employment changes
What does a total product curve look like?
Labour on x axis, output on y axis, points marking attainable and unattainable output levels at different amounts of workers
What does a marginal product curve look like?
Labour on x axis, output on y axis, has a bar chart with a line marking over it, MP is the midway between the quantities of labour to show that it results from changing quantities of labour
How does the total product curve affect the marginal product curve?
The steeper the slope of the TPC, the larger the marginal product. It can be measured by the slope of the TPC.
What are increasing marginal returns?
Increasing marginal returns occurs when the marginal product of an additional worker exceeds the marginal product of the previous worker, they arise from specialisation and division of labour
What are diminishing marginal returns?
The concept whereby firms eventually lose the value of additional labour after benefiting from increasing marginal returns
Why do diminishing returns arise?
They arise from the fact that more workers are using the same capital and are using the same space so there is less to do per worker
When do diminishing returns occur?
Diminishing returns occur when the MP of an additional worker is less than the MP of the previous worker
What is the law of diminishing returns?
As a firm uses more of a variable factor of production with a given quantity of a fixed factor of production, the marginal product of the variable factor eventually diminishes
How does the average product curve relate to the marginal product curve?
Marginal product initially exceeds average product but eventually they equalise, and in turn marginal product becomes less than average product
Where does marginal product cut the average product curve?
At the point of maximum average product
How do we know when average product is increasing?
When marginal product exceeds average product
What is total cost?
The cost of all the FOPs a firm uses, they are separated into variable and fixed.
What is total fixed cost?
The cost of the firm’s fixed factors, they do not change as output increases
What is total variable cost?
The cost of the firm’s variable factors, they change as output changes
What is marginal cost?
The increase in total cost that results from a one unit increase in output, it is calculated as the increase in total cost divided by the increase in output
Why is the marginal cost curve u shaped?
Because when a second worker is hired, MC decreases, but when it hires a third, a fourth and a fifth, mc successively increases
Why does mc decrease initially at small outputs?
Due to greater specialisation and division of labour
Why does mc eventually increase at larger outputs?
Due to diminishing marginal returns, the output of each additional worker is successively smaller and to produce an additional unit of output, ever more workers are required and the cos t of of producing that unit (MC) increases
What is the difference between average fixed cost, average variable cost and average total cost?
AFC is the total fixed cost per unit of output. AVC is the total variable cost per unit of output. ATC is the total cost per unit of output.
How are the average costs calculated?
Dividing total cost components by quantity.
TC/Q TFC/Q TVC/Q
What to the average costs look like on a graph?
The ATC and AVC curves are u shaped. The vertical distance between the ATC and the AVC = FC. The distance shrinks as output increases because AFC declines with increasing output.
Where does the MC curve intersect the AVC curve and the ATC curve?
At their minimum points
What is the relationship between the average cost and the marginal cost?
When MC is less than AC, AC is decreasing, and when MC exceeds AC, AC is increasing
