Topic 12- The Costs of Production Flashcards
What are the inputs used in firm activity
LABOUR
CAPITAL
NAT RES
How do firms turn inputs into outputs?
Technology
Production Function
Relation between the imputs employed by a firm and the manimum output that can be produced
relation b/w max output attainable and amount of capital and labour
Quantity of Output=f(Labour,Kapital)
What is the main objective of the firm
Profit Maximization
Two time frames of firm decision making
- Short Run
- Long Run
Short Run time fram of firms DESCRIBE
- when the quantity of at least one of the firm’s inputs in production is fixed <3
-Capital/Labour/Raw Materials/Factories
Long Run time frame of firms DESCRIBE
When quantities of all imputs are variable!!!
THIS LOOKS DIFFERENT FROM FIRM TO FIRM
How can a firm increase output in the short run?
INCREASE THE AMOUNT OF LABOUR EMPLOYED >3
What three concepts descirve the realtionship between output and the quantity of labour employed?
- TOTAL PRODUCT
- MARGINAL PRODUCT
- AVERAGE PRODUCT
Total product
the total output produced in a given period
Marginal product of labour
is the increase in output that arises from an additional unitof labour empoyed, with all other inputs remaining the same
q2-q1/labour 2-labour1
Average product of labour
is equal to total product divdied by the quantity of labour employed
As the quantity of labour employed increases,
Total Product?
Marginal product?
Average product?
TOTAL PRODUCT INCREASES and decreases
marginal produce INCREASES AND THEN EVENTUALLY DECREASES
Average product increases initially but eventually decreases
What does the total product curve look like?
INCREASES WITH THE AMOUNT OF LABOUR INCREASES
What is the Total Product curve similar to
Similar to the PPF because it shows the attainable output levels from unattainable output levels in the short run
Marginal Product Curve
Initially increases because the marginal product of one worker exceeds the marginal product of the previous worker
(increasing marginal returns nnc SPECIALIZATION)
EVENTUALLY decreases because of diminishing marginal returns property (each extra worker has less access to capital and space!!)
What is the law of idminishing returns?
When fixed inputs has a set quantity, but vbl inputs incerase, the marginal product of the vairable input will eventually decrease!
Average Product Curve
This is closely related to the MARGINAL PRODUCT CURVE
When MPC>APC, APC rises
When MPC=APC, APC at maximum
When MPC<APC, APC falls
SAME RELATION WITH AVERAGE TOTAL COST CURVE
How can firms produce more outputs in the short run??
Employ more labour= which means costs must increase
3 TYPES OF COST:
-TOTAL
-MARGINAL
-AVERAGE
Total Cost
Fixed Cost+ VBL Cost= Total Cost
FIXED= always constant even if output changes
VBL= changes as output changes
Fixed Cost curve
VBL cost curve
Total cost curve
visualizations and logic
Always decreasing L shape, because the more labour the bigger the denom
U shapes Curved and increases as output increases
HIGHEST UP LINE IS TOTAL COST
Why is TC highest up? because you add VBL and fixed to get it
Is total cost ever zero?
NO you have to at least pay fixed costs
Marginal Cost
Increase in total cost that results from one unit increase in total product
MC= CHANGE IN TOTAL COST/CHANGE IN QUANTITY
Marginal cost curve, when does it rise and when does it fall?
Over output with increasing marginal returns, it falls as output increases
Over output with diminishing marginal returns, it rises as output rises
Marginal cost curve, when does it rise and when does it fall?
Over output with increasing marginal returns, it falls as output increases
Over output with diminishing marginal returns, it rises as output rises
LAW OF DIMININGS RETURNS
Average Cost, versions
Average Fixes Cost
Average vbl cost
average total cost
ALL FORMULAS: (type of Cost)/Quantity
Average total cost formula
Average fixed cost + avg vbl cost
or
Total cost/Quantity
Average Fixed Cost curve visual
Downward sloping- fixed costs fall when output increases
Average Vbl cost curve visual
U shaped, because MP exceeds AP, whcih bring rising AP and falling AVC
SLOPES UPWARD BECAUSE OF DIMINISHING RETURNS!!! AVC slopes upward and AVC incerases more quickly then ever!!
Average Total Cost curve, visual
U shaped, it is the vertical sum of AFC and AVC,
U SHAPED BC WHEN AVC Rises more quickly than AFC is decreasing!!!
Which curve is the most special
Marginal Cost curve!
MC curve quirks
Outputs where AVC is fallin, MC is below Average Vbl Cost// when ATC is falling, MC is below ATC
For outputs over whcih AV is rising, MC is ABOVE AVC// when ATC is rising, MC is above ATC
for outputs at the minimum AVC MC=AVC!!!// when minimum ATC=MC
How are product and cost curves related?
THEY ARE THE EXACT OPPOSITE!!!!
When marginal cost is at minimum, marginal product is at maximum,
When marginal product rises, marginal cost falls
Average variable cost is minimum when Average product curve is at maximum
When average product rides, average variable cost is falling
what is true about the long run?
ALL COSTS AND INPUTS ARE VARIABLE!!
Long run average cost curve
Shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed
It is like a cloud outline; you pick the output you wanna produce and see which curve you hit first!!
Economies of Scale
features of a firm’s tech that leads to falling long run average cost as output increases
DisEconomies of Scale
features of a firms tech that lead to rising long run avg cost as output increases
Constant returns to scale
features of a firms tech that lead to constant long run avg cost as output increases
Do firms all experience Economies/diseconomies/constant returns
NO! always experience economies of scale upto some output level; but after that either diseconomies of scale or constant returns!!
Minimum efficient Scale???
smallest quantity of output at which the long run avg cost reaches the lowest level
Can marginal product of a worker be negative?
YES! careful!
REVIEW ALL THE FORMULAS!!!
YES PLEASE
Production Function and Total Cost function
They are inverses of each other and rooted in LAW OF DIMINISHING MARGINAL PRODUCT
Production function (as labour increases, the amount produced decreases and the curve goes up great but flattens out)
Total cost curve (as labour increases cost slowly increase till it goes up exponentially bc a lot of wages!!!)
WHAT UNITS ARE THESE:
average total cost
average fixed cost
average vbl cost
marginal cost
total cost per UNIT
fixed cost per UNIT
vbl cost per UNIT
extra cost for 1 extra UNIT
Shape of average fixed cost
declining slope, this shows that over time, fixed costs decrease!!
Shape of average variable cost
U-shaped because at first the variable cost average decreases, but eventually they increase!!
Shape of average total cost
U shaped because AFC and AVC are fighting for dominance!! It will be higher up than either curve!
When marginal cost curve is beginning to rise what does this indicate
Diminishing marginal product- the cost of one extra unit produced is becoming more expensive!
Does marginal cost curve immediately go upwards?
NO! first it slopes down and then goes up
Why is the LRAC curve ATC u-shaped?
because at first economies of scale occuring (firm knows that it is cheaper to mass produce, so quantity is being increased while costs decline)
then there is a constant return of scale happening (the amount being produce is resulting in a same amount of cost)
then there is a diseconomies of scale (cheaper to produce less)
Average total cost curve relation to marginal cost curve
1) when MC<ATC, ATC is decreasing
2) when MC=ATC, ATC is at minimum level
3) when MC>ATC, ATC is rising
Average product curve shape
LIKE it goes up and then slopes down think like a radical graph
Minimum efficient scale
- the lowest possible production quantity where long-run average cost is at its lowest level
this is where ATC curve is at its’ minimum
Over the output range with increasing marginal returns, marginal cost
——as output increases.
Over the output range with diminishing marginal returns, marginal
cost —– as output increases.
falls
rises
The larger the plant
THE larger is the output where average total cost curve is at minimum
MOST EFFICIENT AND MOST CHEAP POINT OF PRODUCTION
MIN EFFICIENCT SCALE= MIN POINT OF ATC CURVE
