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Econ chapter 11 notes.docx

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Economics 1021A/B

Econ notes- Chapter 11 11.1 - Firms entrepreneurship, land, capital are fixed assets = “PLANT” - In the short run a firms plant is fixed - Can increase or decrease its output by adjusting its variable component LABOUR - Short run decisions are easy to reverse - Long run is where ALL factors of production vary (period in which firm can change its “plant”) - To increase its production a firm can increase its labour or its plant - They cannot easily be reversed - Past expenditure with no resell vale is called a “sunk cost” (a suck cost is irrelevant to a firms current decisions) 11.2 To increase output in short run- hire more labour (relationship described by 3 methods) 1.) Total product 2.) Average Product 3.) Marginal Product (Can be illustrated through product schedules are product curves) Total Product: maximum output that a given quantity of labour can produce (ie. As amount of labour increase the output increases) Marginal Product- increase in total product when one more unit of labour employed is added (all other things remaining the same) Average Product- how productive the workers are on average. Total output divided by quantity of labour employed Short Run- PRODUCT CURVES product curves shows the relationship between the three 1.) TP (total product curve) - Similar to PPF (shows the points attainable and unattainable) 2.) (MC)- Marginal Product Curves - the HEIGHT of this curve measures the SLOPE of the TP at a point - the space of this curve is similar across almost all areas of production because of these two features a.) Increasing marginal returns initially – when the marginal product of a worker exceeds the marginal product of the previous worker (arise from increased specialization and D.O.L of labour) b.) Diminishing marginal returns eventually (marginal product of an additional worker is less then the marginal product of the previous worker. It increases initially but as more and more workers have to use the same space and equipment and more workers is actually less efficient. This is called the Law of diminishing returns 3. AP (average product curve) - average product is greatest when AP = MP - when MP is greater then AP, AP is increasing - when MP is less them AP, AP is decreasing - this is the general feature of the relationship between the average and marginal values of any variable Short-run COST CURVES When a firm wants to increase output it must hire more labour therefore increase costs Describe relationship between output and cost by a.) TC (Total cost)- cost of all factors of production used- Fixed costs, and variable costs TFC (total fixed cost)- includes normal profit which is the OC of entrepreneurship) TVC- changes as output changes TC= TFC + TVC b.) Marginal cost (increase in total cost that results from a one-unit increase in output) - calculate it but the increase in TC divided by the increase in total output - TVC and
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