Chapter 11: Output and Costs - Custom Scholars
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# Chapter 11: Output and Costs

question
Decision Time Frames
What is the entrepreneur's biggest decision?
Which industry to establish a firm. (Often driven by passion and background knowledge/interest, can also be where there is expected economic profit)
question
Decision Time Frames
What is the short run time frame?
When the quantity of at least one factor of production is fixed.
question
Decision Time Frames
What is the plant?
The fixed factors of production. In the short run it is fixed.
question
Decision Time Frames
What is the long run time frame
All factors of production can be variable. Firm can change its plant.
question
Decision Time Frames
What is a sunk cost?
Past expenditure on a plant that has no resale value. Irrelevant to a firm's current decisions.
question
Short-Run Technology Constraint
What points are efficient? (Product Curve)
Only points on the total product curve are technologically efficient.
question
Short-Run Technology Constraint
What are the two features of most product curves?
1) Increasing marginal returns initially (most)
2) Decreasing marginal returns eventually (all)
question
Short-Run Technology Constraint
Increased marginal returns occurs because of? (2)
1) Increased specialization
2) Division of labour in the production process
question
Short-Run Technology Constraint
When does diminishing marginal returns occur?
When marginal product of an additional worker is less than the marginal product of the previous worker. It occurs because more and more people are working in the same space.
question
Short-Run Technology Constraint
How does MP and AP relate? (3)
1) MP intersects AP at maximum
2) MP>AP AP is increasing
3) MP<AP AP is decreasing
question
Short-Run Cost
Total fixed cost includes: (2)
1) Cost of renting capital (plant costs)
2) Normal profit
question
Short-Run Cost
What happens to the vertical distance between AVC and ATC as output increases?
It shrinks because the AFC declines with increasing output.
question
Short-Run Cost
How does MC and AC curves relate? (3)
1) MC intersects both AVC and ATC at minimum
2) When MC<AVC/ATC AVC/ATC is decreasing
3) When MC>AVC/ATC AVC/ATC is increasing
question
Short-Run Cost
Why is the ATC U-shaped? (2)
1) Spreading total fixed cost over a larger output
2) Eventual diminishing returns
question
Short-Run Cost
What is the relationship between AP, MP and AVC and MC? (3)
1) AP is max when AVC is min | MP is max when AP is min
2) As MP increases MC decreases | AP increases, AVC decreases
3) As MP decreases MC increases | AP decreases, AVC increases
question
Short-Run Cost
What are the two factors that position a firm's short run costs?
1) Technology (at small outputs, ATC might increase, but at large outputs ATC decreases)
2) Prices of factors of production
question
Long-Run Cost
The production function is the relationship between:
Maximum output attainable and the quantities of both labour and capital.
question
Long-Run Cost
What are Q, L, K, W and R
Q = Quantity, L = Labour, K = Capital, W = Wages, R = Capital Cost (Rent)
question
Long-Run Cost
What are economies of scale and when do they occur?
Features of a firm's technology that make ATC fall as output increases. Slope downward on LRAC curve.
question
Long-Run Cost
What are diseconomies of scale and when do they occur?
Features of a firm's technology that makes average total cost rise as output increases. Slope upward on LRAC curve.
question
Long-Run Cost
Average total cost is constant as output increases. (Replicating a plant rather than adding more capital)
question
Long-Run Cost
What is minimum efficient scale?
Smallest output at which long-run average cost reaches its lowest level.
question
Long-Run Cost
How does minimum efficient scale determine how many firms in market?
If MES is small, room for many firms; if large room for few firms.
1 of 23
question
Decision Time Frames
What is the entrepreneur's biggest decision?
Which industry to establish a firm. (Often driven by passion and background knowledge/interest, can also be where there is expected economic profit)
question
Decision Time Frames
What is the short run time frame?
When the quantity of at least one factor of production is fixed.
question
Decision Time Frames
What is the plant?
The fixed factors of production. In the short run it is fixed.
question
Decision Time Frames
What is the long run time frame
All factors of production can be variable. Firm can change its plant.
question
Decision Time Frames
What is a sunk cost?
Past expenditure on a plant that has no resale value. Irrelevant to a firm's current decisions.
question
Short-Run Technology Constraint
What points are efficient? (Product Curve)
Only points on the total product curve are technologically efficient.
question
Short-Run Technology Constraint
What are the two features of most product curves?
1) Increasing marginal returns initially (most)
2) Decreasing marginal returns eventually (all)
question
Short-Run Technology Constraint
Increased marginal returns occurs because of? (2)
1) Increased specialization
2) Division of labour in the production process
question
Short-Run Technology Constraint
When does diminishing marginal returns occur?
When marginal product of an additional worker is less than the marginal product of the previous worker. It occurs because more and more people are working in the same space.
question
Short-Run Technology Constraint
How does MP and AP relate? (3)
1) MP intersects AP at maximum
2) MP>AP AP is increasing
3) MP<AP AP is decreasing
question
Short-Run Cost
Total fixed cost includes: (2)
1) Cost of renting capital (plant costs)
2) Normal profit
question
Short-Run Cost
What happens to the vertical distance between AVC and ATC as output increases?
It shrinks because the AFC declines with increasing output.
question
Short-Run Cost
How does MC and AC curves relate? (3)
1) MC intersects both AVC and ATC at minimum
2) When MC<AVC/ATC AVC/ATC is decreasing
3) When MC>AVC/ATC AVC/ATC is increasing
question
Short-Run Cost
Why is the ATC U-shaped? (2)
1) Spreading total fixed cost over a larger output
2) Eventual diminishing returns
question
Short-Run Cost
What is the relationship between AP, MP and AVC and MC? (3)
1) AP is max when AVC is min | MP is max when AP is min
2) As MP increases MC decreases | AP increases, AVC decreases
3) As MP decreases MC increases | AP decreases, AVC increases
question
Short-Run Cost
What are the two factors that position a firm's short run costs?
1) Technology (at small outputs, ATC might increase, but at large outputs ATC decreases)
2) Prices of factors of production
question
Long-Run Cost
The production function is the relationship between:
Maximum output attainable and the quantities of both labour and capital.
question
Long-Run Cost
What are Q, L, K, W and R
Q = Quantity, L = Labour, K = Capital, W = Wages, R = Capital Cost (Rent)
question
Long-Run Cost
What are economies of scale and when do they occur?
Features of a firm's technology that make ATC fall as output increases. Slope downward on LRAC curve.
question
Long-Run Cost
What are diseconomies of scale and when do they occur?
Features of a firm's technology that makes average total cost rise as output increases. Slope upward on LRAC curve.
question
Long-Run Cost
Average total cost is constant as output increases. (Replicating a plant rather than adding more capital)
question
Long-Run Cost
What is minimum efficient scale?
Smallest output at which long-run average cost reaches its lowest level.
question
Long-Run Cost
How does minimum efficient scale determine how many firms in market?
If MES is small, room for many firms; if large room for few firms.

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