ch 11 output and costs.docx

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Accounting & Financial Management
AFM 102
Tom Vance

11– output andcosts Chapter 11: Output & Costs Decision Time Frames  decisions about the quantity to produce and the price to charge depends on the type of market in which the firm operates  decisions about how to produce a given output doesn’t depend on the type of market The Short Run  short run: the time frame in which the quantity of at least one factor of production is fixed  we call the fixed factors of production the firm’s plant; in the short run, the firm’s plant is fixed  to increase output in the short run, a firm must increase the quantity of a variable factor of production (usual- ly labour)  short-run decisions are easily reversed The Long Run  long run: a time frame in which the quantities of all factors of production can be varied  in the long run, a firm can change its plant  to increase output in the long run, the firm can change its plant as well as the quantity of labour  long-run decisions are not easily reversed  sunk cost: the past expenditure on a plant that has no resale value  is irrelevant to the firm’s current decisions Short-RunTechnology Constraint  the relationship between output and the quantity of labour can be described by relating:  total product  marginal product  average product Product Schedules  total product: the maximum output that a given quantity of labour can produce  marginal product: the increase in total product that results from a one-unit increase in the quantity of labour  average product: the total product divided by the quantity of labour  as the quantity of labour increases, marginal product increases initially and then starts to decrease  average product also increases at first, and then decreases Total ProductCurve  shape: curve becomes steeper at small quantities of labour and reaches a maximum, then starts to fall  is like the PPF as it separates attainable and unattainable output levels  only points on the TP curve are technologically efficient Marginal Product Curve  shape: starts of low, and reaches a peak quickly, and then low decreases  the height of the MP curve measures the slope of the TP curve  plot the marginal product at the midpoint between workers  key features: increasing marginal returns initially, diminishing marginal returns eventually  diminishing marginal returns: occurs when the marginal product of an additional workers is less than the marginal product of the previous worker (total product drops with an additional worker) page 1 of 4 11– output andcosts  more and more workers use the same space, so there becomes less productive work for the additional work- ers  law of diminishing returns: a firm uses more of a variable factor of production, with a given quantity of the fixed factor of
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