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Chapter 7

ECON-UA 2 Chapter Notes - Chapter 7: Variable Cost, Opportunity Cost, Marginal Product


Department
Economics
Course Code
ECON-UA 2
Professor
Marc Lieberman
Chapter
7

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Business Firms
Organizations owned and operated by private individuals that specialize in production.
Production
Production is the process of combining inputs to make goods and services.
Technology (in relation to a business firm)
A firm’s technology refers to the methods it can use to turn inputs into outputs (produced goods or
services).
Long run
A time period long enough for a firm to change the quantity of all of its inputs.
Variable Inputs
Inputs that can be adjusted up or down as desired. This is the case with all inputs in the long run, but not
the short run.
Fixed Inputs
Inputs that, over the time period we’re considering, cannot be adjusted, even if the firm’s level of output
changes. This is the case of all inputs in the short run, but not the long run.
Short Run
A time period during which at least one of the firm’s inputs is fixed.
Total Product
The maximum quantity of output that can be produced from a given combination of inputs.
Marginal Product of Labor
How much output increases with each one-unit rise in employment
Mathematical Formula for MPL
MPL= ∆Q/∆L
Q=Total ProductL=Number of laborers employed
Increasing Marginal Returns to Labor
When the marginal product of labor rises as more workers are hired
Diminishing Marginal Returns to Labor
When the marginal product of labor is decreasing
Law of Diminishing Marginal Returns
States that as we continue to add more of any one input (holding the other inputs constant), its marginal
product will eventually decline.
What is a firm’s total cost of producing a given level of output?
The opportunity cost of the owners—everything they must give up in order to produce that amount of
output.
Sunk Cost
One that already has been paid, or must be paid, regardless of any future action being considered.
SUNK COSTS SHOULD NOT BE CONSIDERED WHEN MAKING DECISIONS!!
Foregone Labor Income
The wage or salary you could be earning else-where
Forgone Interest
The funds used to buy capital could have been used for some other purpose, and their next best use,
they would have earned interest; this forgone interest is an opportunity cost of production.
Least-cost rule
A business firm will produce any given output level using the least-cost combination of inputs available to
it.
Fixed Costs
The costs of a firm’s fixed inputs. Like the fixed inputs themselves, fixed costs must remain the same no
matter what the level of output
Variable Costs
The costs of obtaining a firm’s variable inputs. These costs, like the usage of variable inputs themselves,
will rise as output increases
Total Fixed Cost
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