Economics 1021A/B Chapter Notes -Average Variable Cost, Marginal Product, Marginal Cost

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Nicole Wallenburg
Economics
Mr. Parkin
Nov 7, 2011
Economics Textbook Notes
Decision Time Frames
People who operate firms make many decisions, and all of their decisions are aimed at
achieving one overriding goal: maximum attainable profit.
All types of firms in all types of markets make similar decisions about how to produce.
The actions that a firm can take to influence the relationship between output and cost
depends on how soon the firms want to act.
A firm that plans to change its output rate tomorrow has fewer options than one
that plans to change its output rate six months or six years from now
To study the relationship between a firm’s output decision and its costs, we distinguish
between two decision time frames:
The short run
The long run
The Short Run
The short run us a time frame in which the quantity of at least one factor of production is
fixed. For most firms, capital, land, and entrepreneurship are fixed factors of production
and labour is the variable factor.
To increase output in the short run, a firm must increase the quantity of a variable
factor of production which is usually labour
Short run decisions are easily reversed
The firm can change its production in the short run by increasing or decreasing
the amount of labour it hires
The Long Run
The long run is a time frame in which the quantities of all factors of production can be
varied.
To increase output in the long run, a firm can change its plant as well as the
quantity of labour it hires.
Long run decisions are no easily reversed
Past expenditure on a plant that has no resale value a sunk cost
o They are irrelevant to a firms current decisions
Short-Run Technology Constraint
To increase output in the short run, a firm must increase the quantity of labour employed,
We describe the relationship between output an the quantity of labour employed by using
three related concepts:
Total Product
Marginal Product
Average Product
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Nicole Wallenburg
Economics
Mr. Parkin
Nov 7, 2011
Product Schedules
Total Product
o The maximum output that a given quantity of labour can produce
o Each increase in employment increases total product
Marginal Product
o The increase in total product that results from a one-unit increase in the
quantity of labour employed
Average Product
o Equal to the total product divided by the quantity of labour employed
Product Curves
Product curves are graph of the relationships between employment and the three product
concepts.
They show how total product, marginal product, and average product change as
employment changes.
Total Product Curve
AS employment increases from zero to 1 worker a day, the curve becomes steeper. Then,
as employment increases to 3, 4, and 5 workers a day, the cure becomes less steep.
All the points that lie above the curve are unattainable. Points that lie below the curve, are
attainable, but they are inefficient they use more labour than necessary to produce a
given output.
Only the points on the total product curve are technologically efficient.
Marginal Product Curve
Marginal product is also measured by the slope of the total product curve.
The height of the marginal product curve measures the slope of the total product curve at
a point.
The shapes of product curves are similar because almost every production process has
two features:
Increasing Marginal Returns
o Occurs when the marginal product of an additional worker exceeds the
marginal product of the previous worker
This arises from increased specialization and division of labour
Two workers can specialize in different parts of the production
process and can produce more than twice as much as one worker
o The marginal product of the second worker is greater than the marginal
product of the first worker
o Marginal returns are increasing
Diminishing Marginal Returns
o Occurs when the marginal product of an additional worker is less than the
marginal product of the previous worker
This arises form the fact that more and more workers are using the
same capital and working in the same space
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