Class Notes (834,986)
Canada (508,846)
Economics (994)
ECON 101 (318)
Lecture

Chapter 11- Output Costs

8 Pages
88 Views
Unlock Document

Department
Economics
Course
ECON 101
Professor
Emanuel Carvalho
Semester
Winter

Description
CHAPTER 11: Output Costs Decision Time Frames  One main goal of firms: maximum attainable profit  There are big decisions that cannot be reversed and small decisions  The biggest decision that an entrepreneur makes is in what industry to establish a firm  Depends on profit prospects total revenue would exceed total costs  Decisions about the quantity to produce and the price to charge depend on the type of market in which the firm operates (Perfect competition, monopolistic competition, oligopoly, and monopoly all confront the firm with their own special problems)  But decisions about how to produce a given output do not depend on the type of market in which the firm operates  All types of firms in all types of markets make similar decisions about how to produce  A firm that plans to change its output rate tomorrow has fewer options than one that plans to change its output rate six years from now  There are two decision time frames: 1. The short run 2. The long run The Short Run  Short run: A time frame in which the quantity of at least one factor of production is fixed  For most firms, capital, land and entrepreneurship are fixed factors of production and labour is the variable factor of production  We call the fixed factors of production the firm’s plant: In the short run the firm’s plant is fixed  To increase output in the short run, a firm must increase the quantity of a variable factor of production, which is usually labour  Short-run decisions are easily reversed The Long Run  Long run: A time frame in which the quantities of all factors of production can be varied. That s, the long run is a period in which the firm can change its plant  To increase output in the long run, a firm can change its plant as well as the quantity of labour it hires  Long-run decisions are not easily reversed  Once a plant decision is made, the firm usually must live with it for some time  To emphasize this fact, we call the past expenditure on a plant that has no resale value a sunk cost  A sunk cost is irrelevant to the firm’s current decisions  The only costs that influence its current decisions are the short-run cost of changing its labour inputs and the long-run cost of changing its plant Short-Run Technology Constraint  To increase output in the short run, a firm must increase the quantity of labour employed. We describe the relationship between output and the quantity of labour employed by using three related concepts: 1. Total product 2. Marginal product 3. Average product Product Schedules  Total product: The maximum output that a given quantity of labour can produce  Marginal product of labour: The increase in total product that results from a one-unit increase in the quantity of labour employed, other inputs remaining the same  Average product of labour: Equal to the total product divided by the quantity of labour employed Product Curves  Product curves are graphs of the relationships between employment and the three product concepts: total product, marginal product and average product  They show how total product, marginal product, and average product change as employment changes Total Product Curves  Graph of total product schedule  To graph the entire total product curve, we vary labour by hours rather than whole days  As employment increases from zero to 1 worker a day, the curve becomes steeper  Then, as employment increases to 3,4 and 5 workers a day, the curve becomes less steep  The total product curve is similar to the production possibilities frontier  It separates the attainable output levels from those that are unattainable  All the points that lie above the curve are unattainable  Points that lie below the curve, are attainable, but are inefficient- they use more labour than is necessary to product a given output  Only the points on the total product curve are technologically efficient Graph: Marginal Product Curve  From the total product graph, the height of a bar measures marginal product  Marginal product is also measured by the slope of the total product curve  From the marginal product curve, the height of this curve measures the slope of the total product curve at a point  The marginal product is plotted at the midpoint between the transition of the increase in labour  The total product and marginal product curves differ across firms and types of goods, but the shapes of the product curves are similar because almost every production process has two features: 1. Increasing marginal returns initially 2. Diminishing marginal returns eventually Increasing Marginal Returns  Increasing marginal returns occur when the marginal product of an additional worker exceeds the marginal product of the previous worker  Increasing marginal returns arise from increased specialization and division of labour in the production process Diminishing Marginal Returns  Most production processes experience increasing marginal returns initially, but all production processes eventually reach a point of diminishing marginal returns  Diminishing marginal returns: Occur when the marginal product of an additional worker is less than the marginal product of the previous worker  Diminishing marginal returns arise from the fact that more and more workers are using the same capital and working in the same space  As more workers are added, there is less and less for the additional workers to do that is productive  E.g. Third worker is added, but has nothing to do because the machines are running without the need for further attention  Hiring more and more workers continues to increase output but by successively smaller amounts  Law of diminishing returns: As a firm uses more of a variable factor of production, with a given quantity of the fixed factor of production, the marginal product of the variable factor eventually diminishes Average Product Curve  Average product is largest when average product and marginal product are equal  That is, the marginal product curve cuts the average product curve at the point of maximum average product  For the number of workers at which marginal product exceeds average product, average product is increasing  For the number of workers at which marginal product is less than average product, average product is decreasing  The relationship between average product and marginal product is a general feature of the relationship between the average and marginal values of any variable Short-Run Cost  To produce more output in the short run, a firm must employ more labour, which means that it must increase its costs. We describe the relationship between output and cost by using three cost concepts: 1. Total cost 2. Marginal cost 3. Average cost Total Cost  A firm’s total cost (TC) is the cost of all the factors of product it uses  We separate total cost into total fixed cost and total variable cost  Total fixed cost (TFC) is the cost of the firm’s fixed factors  The quantities of fixed factors don’t change as output changes, so total fixed cost is the same at all outputs  Total variable cost (TVC) is the cost of the firm’s variable factors  Total variable cost changes as output changes  Total cost is the sum of total fixed cost and total variable cost  TC = TFC + TVC  In a total cost curve, total fixed cost equals the vertical distance between the TVC and TC curves Marginal Cost  A firm’s marginal cost is the increase in total cost that results from a one-unit increase in output  We calculate marginal cost as the increase in total cost divided by the increase in output  At small outputs, marginal cost decreases as output increases because of greater specialization and the division of labour, but as output increases further, marginal cost eventually increases because of the law of diminishing returns  The law of diminishing returns means that the output produced by each additional worker is successively smaller  To produce an additional unit of output-marginal cost- must eventually increase  Marginal cost tells us how total cost changes as output increases Average Cost  Three average costs of production are 1. Average fixed cost 2. Average variable cost 3. Average total cost  Average fixed cost (AFC) is total fixed cost per unit of output  Average variable cost (AVC) is total variable cost per unit of output  Average total cost (ATC) is total cost per unit of
More Less

Related notes for ECON 101

Log In


OR

Join OneClass

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

Sign up

Join to view


OR

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.


Submit