The Production Function Flashcards
Constant Economics of Scale
When your LRAC is constant as output increases
The Production Function
Inputs of your production into a function that tells you volume of output
Short-Run: some inputs fixed
TPL
Total Product
Amount of product produced with the given amount of labour
MPL
Marginal Product of Labour
How much product for most recent unit of labour
(Q2-Q1)/(L2-L1) or (TPL2-TPL1)/(L2-L1)
Slope of TP curve
VMPL
Value Marginal Product of Labour
Convert MPL to dollars
VMPL = MPL * p
APL
Average Product of Labour
TPL/L
How much produced relative current amount of labour
Diminishing Returns
MPL decreasing
MPL2 < MPL1
MC
Marginal Cost
How much did last increment in output cost?
(C2-C1)/(Q2-Q1) or (C2-C1)/(TP2-TP1)
As MPL increases, MC decreases
As MPL decreases, MC increases
AVC
Average Variable Costs
AVC = VC/TPL
Minimum of AVC when AVC = MC
When AVC > MC: AVC decreasing
When AVC < MC: AVC increasing
AFC
Average Fixed Cost
Constantly decreasing
FC/TPL
ATC
Average Total Costs
Minimum MC = ATC
TC/TPL = AFC + AVC
When ATC > MC: AVC decreasing
When ATC < MC: AVC increasing
LRAC
Long Run Average Cost
No fixed costs, so you want to take the minimum of ATCs for each variation of what is a fixed cost in the short run
Graph will be flatter than ATC curves
Profit Maximum
VMPL = w = MC * p
where w is unit cost of labour
or where MC = MR
Profit
Revenue - Costs
= (MC-ATC)(Q) = (MR-ATC)(Q)
Economies of Scale
When LRAC decreasing as output increases
Can order in bulk, specialize, etc. so efficiency is improving
Diseconomies of Scale
LRAC is increasing as output increases
Coordination issues
MES
Minimum Efficient Scale
When LRAC at minimum
Need to be at to be competitive in market
Economies of Scope
When the total cost of producing two products within the same firm is lower than when the products are produced by separate firms
C(Q1,0) + C(0,Q2) > C(Q1,Q2)
Cost Complimentary
When the marginal cost of producing one type of output decreases when the output of another good is increased
🔺MC1(Q1,Q2)/Q2 < 0
Production of doughnuts and doughnut holes
Increasing Marginal Returns
Range where MPL increasing
Négative Marginal Returns
Range where MPL is negative
