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01:220:102 (14)
Chapter 12


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Thomas Prusa

Chapter 12– Behind the Supply Curve: Inputs and Costs The Production Function Inputs and Outputs  Production function- relationship between the quantity of inputs a firm uses and the quantity of output it produces  Fixed input- input whose quantity is fixed for a period of time and cannot be varied  Variable input- input whose quantity the firm can vary at any time  Long run- time period in which all inputs can be varies  Short run- time period in which at least one input is fixed  Total product curve shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input  Marginal product on an input- additional quantity of output that is produced by using one more unit of that input  Marginal product of labor=change in quantity of output/change in quantity of labor  Diminishing returns to an input when an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input o Downward-sloping marginal product curve and a total product curve that becomes flatter as more output is produced From the Production Function to Cost Curves  Fixed cost- cost that does not depend on the quantity of output produced; cost of the fixed input  Variable cost- cost that depends on the quantity of output produced; cost of the variable input  Total cost of producing a given quantity of output is the sum of the fixed cost and the variable cost of producing that quantity of output o TC=FC+VC  Total cost curve shows how total cost depends on the quantity of output o Becomes steeper as more output is produced due to diminishing returns to the variable input Two Key Concepts: Marginal Cost and Average Cost Marginal Cost  Marginal cost- total cost generated by producing one more unit of output  MC= change in total cost / change in quantity of output Average Cost  Average total cost (average cost)- total cost divided by quantity of output produced o ATC= TC/Q  U-shaped average total cost curve falls at low levels of output, then rises at higher levels o When U-shaped average total cost curve slopes downward  spreading effect dominates; fixed cost is spread over more units of output o When it slopes upward  diminishing returns effect dominates; additional unit of output requires more variable inputs  Average fixed cost- fixed cost per unit of
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