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Chapter 11 Notes.docx

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Department
Economics
Course
Economics 1021A/B
Professor
Jeannie Gillmore
Semester
Fall

Description
Chapter 11 Notes Decision Time Frames  the goal of all firms is to maximize attainable profit  decisions are either made in the long run or the short run  short run o time frame in which the quantity of at least one factor of production is fixed  typically capital, land, and entrepreneurship constant, labour variable  fixed factors of product called plant  in the short run, a firm’s plant is fixed o short run decisions are easily reversed  the firm can change its output in the short run by changing the quantity of labour it employees  long run o time frame in which the quantity of all factors of production can be varied o to increase an output in the long run, a firm can change its plant as well as the quantity of labour it hires o decisions not easily reversed  past expenditure on plant that has no resale value is referred to as a sunk cost Short Run Technology Constraint  total product is the total output of a good produced  marginal product of labour is the increase in total product that results from a one-unit increase in the quantity of labour employed, with all other input remaining the same  average product of labour is equal to total product divided by the quantity of labour employed Total Product Curve  the total product curve shows quantities of product that are attainable and unattainable  only points on the total product curve are technologically efficient Marginal Product Curve  the height of the curve measures the slope of the total product curve  the total product and marginal product curves differ across firms and types of goods  the shapes of product curves are similar due to two features: o increasing marginal returns initially o diminishing marginal returns eventually  increasing marginal returns o occurs when the marginal product of an additional worker exceeds the marginal product of the previous worker o increasing marginal returns arise from increased specialization and division of labour in the production process  diminishing marginal returns o occurs when the marginal product of an additional worker is less than the marginal product of the previous worker o arise from the fact that more and more workers are using the came capital and working in the same space o as more workers are added, there is less and less for the additional workers to do that is productive o this phenomenon is called the 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 of labour shows the relationship between average product and marginal product  average product is largest when it is equal to marginal product o the marginal product curbe cuts the average product curbe 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 Short-Run Cost  to produce more output in the short run, a firm must employ more labour, which means it must increase its costs o the relationship between output and cost is described by TOTAL, MARGINAL, and AVERAGE COST  total cost o the cost of all factors of production and its uses o separated into fixed and variable costs o total fixed cost is the cost of the firm’s fixed factors, which does not change with output o total variable cost is the cost of the firm’s variable factors (typically labour), and changes as output change o TC = TFC + TVC  marginal cost o the increase in total cost that results from a one-unit increase in output o MC = ∆TC ÷ ∆Q o at small outputs, marginal cost decreases as output decreases because of greater specialization and the division of labour o as output increases, marginal cost increases because of the law of diminishing returns  output produced by each additional worker is successively smaller o to produce an additional unit of output, more workers are required, and the marginal cost must eventually increase  average cost o average total cost is the total cost per unit of output o average fixed cost is total fixed cost per unit of output o average variable cost is total variable cost per unit of output Marginal Cost and Average Cost  the marginal cost curve (MC) intersects the average variable cost curbe and the average total cost curve at
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