Class Notes (811,705)
Canada (494,883)
Economics (486)
ECON 103 (154)


8 Pages
Unlock Document

ECON 103
Vera Lantinova

Fraser International College ECON1034 “Principles of Microeconomics” Chapter 11: Output and Costs THE KEY CONCEPTS in this chapter: - The short run and short-run decisions - Short-run product and cost; curves; shifts of curves - The long run and long-run decisions - Long –run cost; curves - Production function - Economies and diseconomies of scale A firm makes decisions in the short run and long run. The firm’s costs and output depend on this time horizon. The short run is a time period in which the quantity of at least one input is fixed and cannot be changed by a firm’s decision. Usually, the inputs that are fixed in the short run are physical capital, land, and entrepreneurship. So, in the short run, a firm makes decision only about labor: how many workers to hire. If a firm wants to produce more in the short run, it has to hire more workers who will work on the existence equipment. Short Run Decisions are easily reversed. The long run is a time period in which the quantity of any input and of all inputs can be changed by a firm’s decision. So, in the long run a firm makes decisions about how much equipment to have, how many materials to buy, how many workers to hire, how to organize management. If a firm wants to produce more in the long run, it could build additional factories, buy more land, hire more workers, change management. 1 Long run decisions determine what a firm could do in the short run, because long-run decision are often not reversible: once a factory was equipped with certain type of machines, it could be difficult to change these machines into a different type. Past expenditures on firm’s inputs that cannot be resold are sometimes called sunk costs Sunk Cost is the cost which is not recoverable. Short-run product and costs In the short run, firm’s output and costs depend on the labor input. Output and labor are related through the co-called “product” of labor. There are: 1. Total product of labor 2. Marginal product of labor 3. Average product of labor Total product of labor This is the maximum quantity of output that a given number of workers can produce in a given unit of time (for example, per day). As the number of workers increases, total product increases. Points on the curve are Efficient. Marginal product of labor This is measured by how many units of output are added to the total product by each additional worker. At first, each additional worker contributes more than the previous one. This is called increasing marginal returns. But as more workers are added, each additional worker contributes less than the previous one. This is called diminishing marginal returns. At start value increases but after reaching maximum it decreases. 2 Average product of labor This is the total product divided by the number of workers. This ratio tells us how productive workers on average. It keep on decreasing as the worker increases. Average product and marginal product are related in a specific way. Labor Total product Marginal product Average product (number (units of output (units of output per (units of output per of workers) per day) additional worker) worker) A 0 0 B 1 4 C 2 10 D 3 13 E 4 15 F 5 16 Product curves We could represent the costs as curves, on a diagram. 1. Total product of labor Marginal product of labor Average product of labor 3 Short-run costs 1. Total cost 2. Marginal cost 3. Average cost Total cost is the cost of all inputs a firm uses. Total cost (TC) consists of: - Total fixed cost (TFC): i
More Less

Related notes for ECON 103

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.