Topic 7 Flashcards
what is a production function
the relationship between the quantity of inputs a firm uses and the quantity of output it produces
what is a fixed input
an input whose quantity is fixed for a period of time and cannot be varied
what is a variable input
an input whose quantity the firm can vary at any time
define long run
the period in which all inputs can be varied
define short run
the period in which at least one input is fixed
describe the total product curve
shows how the quantity of output depends on the quantity of the variable input for a given quantity of the fixed input
define marginal product
The marginal product of an input is the additional quantity of output that is produced by using one more unit of that input
what is the marginal product of labour
change in output resulting from a one-unit increase in the amount of labour input Δq/ΔL
describe diminishing returns to an input
an increase in the quantity of that input, holding other inputs and technology fixed, reduces that inputs marginal product
marginal product is the slope of the:
marginal cost curve.
total product curve.
long-run average total cost curve.
total cost curve.
Total product curve
define fixed cost
cost that does not depend on the quantity of output produced. It is the cost of the fixed input
define variable cost
cost that depends on the quantity of output produced. It is the cost of the variable input
The total cost of producing a given quantity of output is the sum of
the fixed cost and the variable cost of producing that quantity of output
The total cost curve shows how total cost depends on the _________
quantity of output
The total cost curve becomes steeper as more output is produced, a result of __________ _________
diminishing returns
what is the marginal cost equal to
the change in total cost generated by one additional unit of output
MC = ΔTC/Δq
Why is the marginal cost curve upward sloping
because there are diminishing returns to inputs. As output increases, the marginal product of the variable increases.
Equation for average total cost
ATC = TC/q
Equation for average fixed cost
AFC = FC/q
Equation for average variable cost
AVC = VC/q
Increasing output has what two opposing effects on average total cost
The spreading effect and the diminishing return effect
describe the spreading effect
the larger the output, the more output over which fixed cost is spread, leading to lower average fixed cost
describe the diminishing returns effect
the larger the output, the more variable input required to produce additional units, which leads to higher average variable cost.
marginal cost slopes upward because of ________ _________
diminishing returns
average variable cost slopes upward but is _______ than the marginal cost curve
flatter
average fixed cost slopes downward because of the _______ ________
spreading effect
the marginal cost curve intersects the ____________________ from below, crossing at its lowest point
average total cost curve
At high levels of output the spreading effect is stronger or weaker than the diminishing returns effect?
weaker
define the minimum-cost output
the quantity of output at which average total cost is lowest (the bottom of the u-shaped average total cost curve)
What are the 3 general principles that are always true about a firms marginal cost and average cost curves
- At the minimum-cost output, average total cost is equal to marginal cost.
- At output less than the minimum-cost output, marginal cost is less than average total cost and average total cost is falling.
- At output greater than the minimum-cost output, marginal cost is greater than average total cost and average total cost is rising.
Marginal cost curves often slope ___________ as the output goes from zero up to some low level, and they slope __________ at higher levels of production.
downward
upward
All inputs are variable in the ______. This means that _____ cost (like factory size) may also vary.
long run
fixed
There are ________ returns to scale when long-run average total cost declines as output increases
increasing
There are _________ returns to scale when long run average total cost increases as output increases
decreasing
There are ________ returns to scale when long run average total cost is constant as output increases
constant
If marginal cost > ATC then is ATC increasing or decreasing
increasing
If marginal cost < ATC then is ATC increasing or decreasing
decreasing
