Week 7 Flashcards
identify the producing behavioral unit, and the unit’s product.
a. Production analysis is the relationship between inputs, or resources, and outputs.
b. Cost analysis is the relationship between the cost of inputs and the various factors that influence that cost, including the volume of output.
c. Cost analysis and production analysis are closely related—in production analysis, the relationship between outputs and inputs is analyzed; in cost analysis, the costs of the inputs at the various output levels are analyzed.
d. Economists call producing units “behavioral units” because they can analyze their economic behavior—production volumes and costs.
i. A firm is an entire organizational entity, and it can produce many different types of services.
Production and cost analysis can be conducted for any of these units—a single- product plant, a single-product firm, a multiproduct plant, or a multiproduct firm.
define inputs or resources.
a. Typically, inputs consist of labor, capital equipment, raw materials, intermediate goods and services, knowledge, and entrepreneurial abilities.
Inputs can be fixed or variable
define the production relation in terms of marginal output and total output.
a. The production relation is a quantitative expression of how outputs change when different quantities of inputs are combined in the production process.
i. For example, the inputs (doctor services, nurse services, office space, and medicines) are combined to produce an output, which can be called patient care, patient visits, or treatment.
b. The production relation can be viewed in terms of total outputs and inputs, or marginal outputs and inputs.
c. These are, in effect, two different ways of representing the same information.
d. The additional production yielded by the use of one extra unit of variable input is called the marginal product.
i. It can be expressed symbolically as ΔQ/ΔL.
Total costs: The sum of fixed and variable costs. All of the costs required to produce a specified level of output.
define short run, long run, fixed inputs, and variable inputs.
a. Resources that cannot be increased during the specified run period are called fixed resources.
b. The concepts of fixed and variable resources are defined in terms of this adjustment time.
i. . For example, consider a home care agency that uses trained nurses, cars, and office space as inputs, and produces home care visits as outputs. If their length of run is one week, then there may be little opportunity for the agency to expand its inputs.
c. In the shortest run, all resources may be fixed.
d. As the adjustment time is increased, the firm will have more ability to find additional resources of each kind, and so more resources become variable
The long run is defined in terms of adjustment possibilities—it is the period for which all resources can be varied.
outline the short-run production relation for a single-product firm.
a. Increasing marginal productivity is a relationship between variable inputs and outputs for specified changes in the level of production.
i. Under increasing marginal productivity, as a variable input is successively increased by one unit, the associated increases in output grow successively larger
b. Under constant marginal productivity, as a variable input is successively increased by one unit, the output increases by a constant amount.
c. Under decreasing marginal productivity, as a variable input is increased by single units, the increase in output declines.
d. The production relation, or production function, is about the relationship between inputs and outputs. The short-run analysis is about the relationship between variable inputs and outputs, assuming that some inputs are fixed.
The relationship can be expressed in total or marginal terms. These two ways of looking at things are closely related. Additional inputs are added to the total inputs we use. And as we increase output (marginal output), we are adding to total output, but in different volumes.
describe how various environmental, behavioral, and product factors shift the production relation.
a. The basic relationship between variable inputs and outputs is derived under the assumption that all other variables are held constant. If these variables change, then the entire production function will change as well
i. Such a change is called a shift in the production function or production relation. An upward shift means productivity has increased; a downward shift means productivity has decreased.
1) the case mix, or the types and severities of the diseases treated. If more severe diseases are treated, then the entire production function will shift downward, meaning less output for any given level of input.
2) the quality of care. Quality can be viewed in terms of providing additional resources for diagnosis and therapy. If quality is viewed in this way, then an increase in quality will mean more resources used for any level of output.
3) worker motivation and incentives. If medical practitioners or employees are given incentives to work more efficiently, then they will produce more output for any given input levels. For example, fee-per-service payment encourages the production of more services in a given time frame.
technology.
4) Highly trained specialists and high-tech equipment are usually associated with high quality, but most likely entail an increase in human and physical capital. This means more input is required to produce a single unit of output (measured as a visit), which may lead to a downward shift in the relationship between input and output. However, the production relationship could shift upward if the introduction of a new piece of equipment increases the quantity of output.
Cost
Cost is defined for any given volume of output. A firm can select many different possible volumes of output, and there will always be a cost associated with each.
Opportunity cost
that is, at the amount that would be paid for these resources in the next highest-valued use that was foregone; the amount for which those resources could be sold in the market; or the market value of the resources used in the production process
Money Cost
Expenditures incurred (paid out) for a given volume of output.
define the terms fixed cost and variable cost, and discuss short-run and long-run analyses in terms of fixed and variable costs.
a. Fixed costs (e.g., periodic rents for buildings and equipment, or contractual expenses) do not change when output changes
b. variable costs (such as expenses for supplies and variable labour inputs) do change when output changes.
c. Whether a cost is fixed or variable will depend on the amount of time a firm has to adjust resources. In the shortest adjustment period, say one day, a firm has very little time to expand or contract resources if, for example, the firm has contracted with nurses for a fixed period, say a week. In this case, even labour costs will be fixed.
There is no one specific definition of short run. In general, short run refers to a period of time over which some inputs cannot be adjusted, and thus, result in fixed costs. In the long run, all inputs can be varied, and so all costs are variable costs.
define the terms marginal cost, average cost, and total cost, and develop a cost schedule relating costs to outputs
a. Marginal and average costs are derived from total cost. Each type of cost is defined at a specified output level.
b. Marginal Costs
i. The change in cost resulting from a change in output by one unit. Because fixed costs do not change with output, marginal cost is related only to variable cost.
c. Average Cost:
i. The unit cost for a selected volume of output; total cost divided by total quantity of output. The average cost is equal to the average variable cost plus the average fixed cost.
d. Total Cost:
The sum of fixed and variable costs. All of the costs required to produce a specified level of output.
Cost Function:
i. A behavioral relationship between cost (viewed from either a marginal, average, or total perspective) and the variables that influence cost, including volume of output, quality of output, input prices, and variables affecting organizational efficiency. See cost curve, long-run cost curve, and short-run cost curve.
changes in any of a number of variables, including volume of output, input prices, case mix, service quality, type of ownership, incentives for productivity, and so on
Cost Curve:
The relationship between cost and volume of output. It can be specified in terms of total costs, average or unit costs, and marginal costs. See long-run cost curve and short-run cost curve.
specify a short-run total cost curve relating total costs to outputs.
a. This analysis illustrates how total costs (TC), total fixed costs (TFC), and total variable costs (TVC) behave.
i. TC = TVC + TFC.
b. Because this example involves a short-run analysis, you would expect some fixed costs. Given the definition of fixed costs, we can identify fixed costs as the costs that occur when there is no output.
Total variable costs increase with output.
derive short-run, average fixed, average variable, and average total cost curves from total cost curves.
a. Average costs
i. Average costs equal the total costs divided by the quantity produced.
ii. The unit cost for a selected volume of output; total cost divided by total quantity of output. The average cost is equal to the average variable cost plus the average fixed cost.
b. Average fixed
i. The unit fixed cost for a specific volume of output. The average fixed cost is equal to the total fixed cost divided by the volume of output.
c. Average Variable
i. The unit variable cost for a specific volume of output; total variable cost divided by quantity of output.
d. Average fixed cost declines steadily as output increases. Both the average variable cost curve and the average total fixed cost curve are U-shaped.
The AFC curve declines continuously because the fixed costs are being spread out over an increasing number of units.
