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Lecture 11

ECON 402 Lecture Notes - Lecture 11: Diminishing Returns, Marginal Product, Marginal Cost

Course Code
ECON 402
William Crowley

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In the short run, at least one of a firm's inputs is fixed, while in the long run, a firm is able to vary all its
inputs and adopt new technology.
The amount of time that separates the short run from the long run is not the same for every firm
Any cost that remains unchanged as output changes represents a firm's fixed cost and any cost that
changes as output changes represents a firm's variable cost.
For example, insurance premiums on property is a fixed cost for a farmer and cost of shipping products is
a variable cost for a business firm.
An implicit cost is a nonmonetary opportunity cost.
The difference between explicit and implicit costs is that an explicit cost is not an opportunity cost, while
an implicit cost is an opportunity cost.
A firm's production function is best described as illustrating the relationship between inputs and the
maximum amounts of output that the firm can produce with these inputs.
A short-run production function holds constant the amount of capital.
Why do the marginal product of labor and the average product of labor curves have the shapes illustrated
in the graph?
1. Whenever the marginal product of labor is less than the average product of labor, it pulls the
average product of labor down
2. The marginal product of labor initially increases due to specialization and then decreases due to
diminishing returns.
In the initial stages of production, specialization and division of labor lead to an increasing marginal
product for workers, allowing workers to concentrate on a few tasks so that they become more skilled
at doing them quickly and efficiently.
This is the law of diminishing returns: at some point, adding more of a variable input to the same
amount of a fixed input will cause the marginal product of the variable input to decline.
The law of diminishing does not apply in the long run
a. When the owner hires 4 workers, the average product of labor is 6 pizzas
b. The marginal product of the fifth worker is 4 pizzas.
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