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Chapter 11

Chapter 11 - Output and Costs.docx

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York University
ECON 1000
Ardeshir Noordeh

ECON 1000 November 19, 2013 CHAPTER 11: Output and Costs • Short-run vs. long-run 1. Short-run: at least one factor of production is fixed. Ex: You have a huge factory. You can have anywhere from 1 to 100 employees (labour) – adjusting this is a short-run decision. The plant size doesn’t change, but the labour does. 2. Long-run: a fixed factor of production changing. Ex: Expanding the size of the factory. Short­Run • To increase output in the short run, a firm must increase the amount of labour employed, which also means it must increase its costs • Three concepts describe the relationship between output and the quantity of labour employed: o Total product = TP o Marginal product = ΔTP/ΔL o Average product = TP/L • The total product curve separates attainable from unattainable output in the short run (like the PPF) • In the figure below: the second worker hired produces 6 units of output and total product becomes 10 units. The third worker hired produces 3 units of output and total product becomes 13 units. And so on. • Because of specialization and division of labour, the marginal product in the beginning is increasing, but then it decreases after a certain point. One person can do so much, with two or three people, each person can specialize in something specific to be more efficient (ex: one cashier, one cook, one cleaner instead of all 3 doing all the tasks). ECON 1000 November 19, 2013 • Almost all production processes are like the one shown here and have: o Initially increasing marginal returns o Eventually diminishing marginal returns • Increasing marginal returns arise from increased specialization and division of labour. • Diminishing marginal returns arises from the fact that employing additional units of labour means each worker has less access to capital and less space in which to work. ECON 1000 November 19, 2013 • Diminishing marginal returns are so pervasive that they are elevated to the status of a “law.” • The law of diminishing returns states that as a firm uses more of a variable input with a given quantity of fixed inputs, the marginal product of the variable input eventually diminishes. • The relationship between a student’s marginal class grade and her or his grade point average (GPA) is similar to that between marginal product and average product. • If a student’s next class grade is higher (lower) than the student’s GPA, this marginal grade will pull the student’s GPA (average grade) up (down). • Costs o Total cost = TFC + TVC o Total fixed cost (TFC) is the cost of the firm’s fixed inputs. Fixed costs do not change with output. o Total variable cost (TVC) is the cost of the firm’s variable inputs. Variable costs do change with output. ECON 1000 November 19, 2013 • Total fixed cost is the same at each output level. Total variable cost increases as output increases. Total cost, which is the sum of TFC and TVC also increases as output increases. In contrast, the TVC becomes less steep at low output levels and steeper at higher levels. • Marginal Cost o Marginal cost (MC) is the increase in total cost that results from a one-unit increase in total product. ECON 1000
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