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Economics 1021A/B Lecture Notes - Fixed Cost, Diminishing Returns, Variable Cost

Course Code
ECON 1021A/B
Emilie Rivers

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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<AP, AP decreases
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