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Chapter 10

Economics 1021A Chapter 10

Course Code
ECON 1021A/B
Terry Biggs

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Economics 1021A Chapter 11 2013-11-03
A firm makes many decisions to achieve its main objective: profit maximization.
Some decisions are critical to the survival of the firm (a big decision that turns out to be incorrect could lead
to a firm’s demise)
Some decisions are irreversible (or very costly to reverse).
All decisions can be placed in two time frames:
The short run
The short run is a time frame in which the quantity of one or more resources used in production is fixed.
For most firms, the capital, called the firm’s plant, is fixed in the short run.
Other resources used by the firm (such as labour, raw materials, and energy) can be changed in the short
Short-run decisions are easily reversed.
The long run
The long run is a time frame in which the quantities of all resources—including the plant size—can be
Long-run decisions are not easily reversed.
A sunk cost is a fixed cost incurred by the firm that cannot be changed or avoided.
Although a firm may incur fixed costs in the long run, these fixed costs are avoidable rather than sunk
costs, as in the short run.
Sunk fixed costs are irrelevant to a firm’s current decisions.
To increase output in the short run, a firm must increase the amount of variable inputs used, which is
usually labour.
Three concepts describe the relationship between output and the quantity of labour employed:
Total product
Total product is the total output produced in a given period.
Marginal product
The marginal product of labour is the change in total product that results from a one-unit increase in
the quantity of labour employed, with all other inputs remaining the same.
Average product
The average product of labour is equal to total product divided by the quantity of labour employed.
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