ECON102 Chapter Notes - Chapter 11: Sunk Costs, Marginal Product, Marginal Cost

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puceclam474

14 Nov 2015

School

University of Waterloo

Department

Economics

Course

ECON102

Professor

Maryann Vaughan

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ECON102 Full Course Notes

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The short run: the short run: easy to reversed. Short-run technology constraint: to increase output in the short run, a firm must increase the amount of labour employed. 3 concepts describe the relationship between output and the quantity of labour employed: total product, marginal product, average product. Marginal product increases initially but eventually decreases. Product curves: product curves shows how the firm"s total product, marginal product, and average product change as the firm varies the quantity of labour employed. Total product curve: figure 11. 1 shows a total product curve, the total product curve shows how total product changes with the quantity of labour employed, is similar to the ppf. It separates attainable and unattainable output levels in the short run. Initially, the marginal product of a worker exceeds the marginal product of the previous worker. Eventually, the marginal product of a worker is less than the marginal product of the previous worker.

Related Questions

Another important concept for business owners is the idea of short-run and long-run decision making. In the short-run, at least one of the firm's factors of production is fixed. Generally, this is their capital. For many businesses, their building rent is considered the fixed cost since many business owners sign long-term lease agreements. In the long-run, everything in the business is considered a variable cost since firms can plan to expand or reduce operations in the long-run.

As a business owner/decision-maker, why do you think it is important to understand the difference between these two concepts? How does the business owner/decision-maker make choices for their firm in the two different time frames?

orchidsea-lion17

Question:

Is it true that in a short-run production process, the marginal cost curve eventually slopes upward because firms have to pay workers a higher wage rate as they produce more output? Explain your answer.

Answer:

According to the definition of the short-run in Investopedia, the short-run, in economics, expresses the concept that an economy behaves differently depending on the length of time it has to react to certain stimuli. The short-run does not refer to a specific duration of time but rather is unique to the firm, industry, or economic variable being studied. A key principle guiding the concept of short-run and long-run is that in the short-run, firms face both variable and fixed costs, which means that output, wages and prices do not have full freedom to reach a new equilibrium. Most businesses make decisions not only about how many workers to employ at any given point in time (i.e. the amount of labor) but also about what scale of an operation (i.e. size of factory, office, etc.) to put together and what production processes to use. In contrast, economists often define the short-run as the time horizon over which the scale of operation is fixed and the only available business decision is the number of workers to employ. Technically, the short-run could also represent a situation where the amount of labor is fixed and the amount of capital is variable, but this is fairly uncommon. The logic is that even taking various labor laws as given, it's usually easier to hire and fire workers than it is to significantly change a major production process or move to a new size of factory or office. In the short-run, one factor of production is fixed, e.g. capital. This means that if a firm wants to increase output, it could employ more workers, but not increase capital in the short-run (it takes time to expand.) Therefore in the short-run, we can get diminishing marginal returns, and marginal costs may start to increase quickly. Also, in the short-run, we can see prices and wages out of equilibrium, e.g. sudden rise in demand, may lead to higher prices, but firms don't have the capacity to respond and increase supply.

Tejvan Pettinger. (2015). Short-run, long-run, very long-run. Glossary Terms. Economics help blog. NY: Helping to Simplify Economic.
Retrieved from: http://www.economicshelp.org/blog/glossary/short-run-long-run-very-long-run/
Short-Run. Short-Run Definition | Investopedia
Retrieved from http://www.investopedia.com/terms/s/shortrun.asp#ixzz4KO1YXsri

I need a peer reply for this, please.

taupeswan96

11)

A constant-cost, perfectly competitive industry experiences a permanent increase in demand. In adjusting to this change, what will happen to the price of the product?

	It will increase in the short-run and then decrease in the long-run, but end up above its original level in the long-run.
	It will increase in the short-run and then increase further in the long-run.
	It will increase in the short-run and then decrease back to its original level in the long-run.
	It will increase in the short-run and then decrease below its original level in the long-run.
	It will decrease in the short-run but return to its original level in the long-run.

12)

Assume that a perfectly competitive firm owns or rents a higher-quality resource that results in lower average total costs and higher economic profits in the short run. What will happen in the long-run?

	The price of the higher-quality resource will be bid upward resulting in economic rents and equalizing costs across firms.
	New firms will enter and compete with any excess profits away.
	None of the other answers is correct.
	The government will tax away any excess profits.
	The firm with the higher-quality resource will earn positive economic profits in the long run.

13)

Which of the following are characteristics of long-run equilibrium?

	No firm has an incentive to change its level of output.
	No firm has an incentive to change its plant size.
	Economic profit is zero
	All of the above
	None of the above

14)

Which of the following statements is consistent with the textbookâs analysis of perfect competition?

	Although individual perfectly competitive firms wonât pay to advertise, the industry as a whole may well advertise.
	Higher costs for one firm in the industry will result in that firm charging a higher price than the other firms in the industry.
	If all the firms in an industry charge an identical price for their products, this is clear evidence of collusive behavior.
	All of the above
	None of the above

15)

The assumptions that define the market structure known as monopoly include which of the following?

	High barriers to entry.
	There is one seller.
	There are no close substitutes available.
	All of the above
	None of the above

amethystbear647

ECON102 Chapter Notes - Chapter 11: Sunk Costs, Marginal Product, Marginal Cost

ECON102 Full Course Notes

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