4F Short-Run Product and Costs

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Gustavo Indart

SHORT-RUN PRODUCT AND COSTS The Production Function Q=f(L,K) Q = flow of output, L = flow of labour services, K = flow of capital services, changes in technology = changes in f Profit-Maximizing Output Profit = TR-TC TR = total revenue, TC = total cost Total, Average, and Marginal Products Total Product (TP or q): total amount produced by a firm during same time period TPL=q = f(L|K) Average Product (AP): AP= TP/L Marginal Product (MP): MP= dTP/dL Law of diminishing returns: if increasing quantities of a variable factor are applied to a given quantity of fixed factors, the variable factor’s marginal product will eventually decrease Where AP reaches its maximum, MP= AP The average curve slopes upward as long as the marginal curve is above it. For example, if MP> AP, AP is rising, if MP< AP, AP is falling. Short-Run Costs Explicit Costs: costs of purchasing/hiring inputs from firms/households Implicit Costs: opportunity costs of inputs owned by the firm itself that are not explicitly paid Total Cost (TC): TFC+TVC Total Fixed Cost (TFC): all costs of production that do not vary with level of output Total Variable Cost (TVC): total costs of production that vary directly with level of output Average Total Cost (ATC): ATC=TC/Q or ATC=AFC+AVC Average Fixed Cost (AFC): TFC/Q Average Variable Cost (AVC): TVC/Q Marginal Cost (MC): MC=dTC/dQ = w/MP (MC=firm's supply
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