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Economics 1021A/B
Emilie Rivers

Economics Chapter 11 – Output and Costs Decision Time Frames  Overall Goal: maximize attainable profit  Biggest decision: what industry to establish a firm, expectation that TR will exceed TC The Short Run  Quantity of at least one factor of production is fixed  Plant: fixed factors of production  Short run decisions are easily reversed  Change output by changing quantity of labour it employs The Long Run  Quantities of all factors of production can be varied  A firm can change its plant  LR decisions are not easily reversed  Sunk Cost: past expenditure on a plant that has no resale value o Irrelevant to firm’s current decisions Short Run Technology Constraint  Product Schedules – how quantity produced increases with more labour, productivity of labour o Total product – max output that a given quantity of labour can produce each increase in employment increases total product o Marginal Product: increase in total product that results from a one- unit increase in the quantity of labour employed o Average Product – (total product) / (quantity of labour) o As quantity of labour employed increases:  Total product increases  MP increases initially but eventually decreases  AP increases initially but eventually decreases  Total Product Curve – graph of total product schedule, separates attainable from unattainable output levels, anything below the curve are inefficient  MP Curve – height of the curve measures the slope of the total product curve at a point, change in output due to an additional worker o Increasing Marginal Returns – MP of an additional worker exceeds the Mp of the previous, increases specialization and division of labour o Diminishing MR – Mp of an additional worker is less then the MP of the previous worker  Average Price Curve – MP curve “pulls” the AP curve o MP>AP, AP increases o MP
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