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Econ 11, 12.docx

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York University
ECON 1000
George Georgopoulos

Ch. 11: Output and Costs  Short run: time frame in which the quantity of at least one factor of production is fixed o Capital, land and entrepreneurship tend to be fixed o Labour, raw materials, and energy can usually be changed o Short run decisions easily reversed  Long run: time frame in which the quantities of all factors of production can be varied o Long run decisions are not easily reversed o Sunk cost: a cost incurred by the firm and cannot be changed  Short-run technology constraint: to increase output in the short run, a firm must increase the quantity of labour employed. o Total product: the maximum output that a given quantity of labour can produce o Marginal product: the increase in total product that results from one-unit increase in the quantity of labour employed, other inputs remaining the same o Average product: equal to the total product divided by the quantity of labour employed  Product curves: graphs of relationships between employment and the three product concepts o Total product curve: similar to PPF, separates attainable product levels from unattainable product levels  Height of each bar measures marginal product o Marginal product curve: how the marginal product relates to total product  Law of diminishing marginal 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  Factors of production become less suited, and less access to capital o Average product curve: shows average product and its relationship with marginal product  when marginal product equals average product, average product is at a maximum  short-run costs: to produce more output in the short run, a firm must employ more labour, which means that it must increase its costs o total cost (TC): cost of all the factors of production it uses (total fixed costs and total variable costs)  TC = TFC = TVC  total fixed costs (TFC): costs of firms fixed inputs, do not change with outputs  total variable costs (TVC): cost of firms variable inputs, change with outputs o marginal cost: the increase in total costs from a one-unit increase in total product o average cost (ATC): total cost per unit of output  ATC = AFC + AVC  TC/Q = TFC/Q + TVC/Q  average fixed cost (AFC): total fixed cost per unit of output  average variable cost (AVC): total variable cost per unit of output  marginal cost curve intersects the average variable cost curve and the average total cost curve at their minimum points  when marginal product is rising, marginal cost is falling  when average product is rising, average variable cost is falling  shifts in cost curves: technology and price of factors of production  production function: relationship between maximum output attainable and the quantities of both capital and labour  long-run average cost curve: relationship between the lowest attainable average total cost and output when the firm can change both the plant it uses and the quantity of labour it employs  economies of scale: features of a firm’s technology that make average total cost fall as output increases  diseconomies of scale: features of a firm’s technology that make average total cost rise as output increases  constant returns to scale: features of a firm’s technology that keep average total cost constant as output increases  minimum efficient scale: smallest output at which long-run average cost reaches its lowest level Ch. 12: Perfect Competition  Perfect Competition: o Many firms sell identical products to many buyers o There are no restrictions on entry into the market o Established firms have no advantage over new ones o Sellers and buyers are well informed about prices  How perfect competition arises: o Minimum efficient scale of a single producer is small relative to the market demand for the good or service. Room for many firms o each firm is perceived to produce a good or service that has no unique characteristics, so consumers don’t care which firm they buy from  Price taker: firm that cannot influence the market price beca
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