Econ: Chapter 13- The Costs of Production - Custom Scholars
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# Econ: Chapter 13- The Costs of Production

question
Production Function
Relationship between:
-quantity of inputs used to make a good
and
-the quality of output of that good
Gets flatter as production rises
question
Marginal Product
-Increase in output that arises from an additional unit of input
--other inputs constant
question
Marginal product of labor, MPL
MPL= change in Q / change in L
-If Jack hires one more worker, his output rises by the marginal product of labor
question
How are marginal product and production function related?
Can be seen as the Slope of the production function
question
Diminishing Marginal Product
-Marginal product of an input declines as the quantity of the input increases
-Production function gets flatter as more inputs are being used:
--The slope of the production function decreases
question
Why is MPL important
"Rational people think at the margin"
When farmer Jack hires an extra worker:
-His costs rise by the wage he pays the worker
-His output rises by the MPL
-Comparing them helps Jack decide whether he should hire the worker
question
Why MPL diminishes..
Farmer Jack's output rises by a smaller and smaller amount for each additional worker. Why?
-As Jack adds workers, the avg worker has less land to work with and will be less productive
-In general, MPL diminishes as L rises whether the fixed input is land or capital (equipment, machines, etc.)
question
Marginal Cost, MC
-Increase in total cost arising from an extra unit of production
-Marginal cost= Change in total cost / Change in quantity
-Increase in total cost from producing an additional unit of output
question
Formula for Marginal Cost
MC= change in Total cost/ change in Quantity
question
Fixed costs, FC
Costs that do not vary with the quantity of output produced
-For Farmer Jack, FC = \$1000 for his land
-Other examples: cost of equipment, loan payments, rent
question
Variable costs, VC
costs that vary with the quantity of output produced
-For Farmer Jack, VC=wages he pays workers
-Other example: cost of materials
question
Average Total Cost (ATC) formula
ATC= Total cost / Quantity
OR
ATC= AFC + AVC
question
Average Fixed Cost (AFC) formula
AFC= FC/Q
question
Average Variable Cost (AVC) formula
AVC= VC/Q
question
Does ATC lie above or below AVC?
ATC will be above AVC because AVC + AFC= ATC
question
Is AFC above or below ATC?
Below because FC are the same regardless of quantity sold and will always be decreased
question
How does Marginal Cost usually look on a graph?
Usually upward slow, may have a little downward slope initially
-the MC curve crosses the ATC curve at the ATC curve's minimum
question
When MC < ATC, ATC is...
falling
question
When MC > ATC, ATC is...
rising
question
Short Run
-Some inputs are fixed (e.g., factories, land)
-The costs of these inputs are Fixed Costs
question
Long Run
-All inputs are variable (e.g. firms can build more factories or sell existing ones)
question
In the long run..
ATC at any Q is cost per unit using the most efficient mix of inputs for that Q (e.g., the factory size with the lowest ATC)
question
Economies of scale
Average Total Cost falls as quantity increases
-Long run average total cost falls as the quantity of output increases
--increasing specialization among workers
--More common when Q is low
question
Constant returns to scale
ATC stays the same as Q increases
-Log run average total cost stays the same as the quantity of output changes
question
Diseconomies of scale
ATC rises as Q increases
-Increasing coordination problems in large organization
--e.g., management becomes stretched can't control costs
--More common when Q is high
question
Formula for Economic Profit
Economic Profit=Total revenue - Total cost (including explicit and implicit costs)
question
Formula for Accounting Profit
Total revenue - total explicit costs
question
Is Accounting or Economic profit higher?
Accounting profit because it ignores implicit costs
question
Formula for total revenue
TR= P x Q
question
Explicit Costs
Require an outlay of money-
-rent
-inputs for production
-paying wages to workers
question
Implicit Costs
-Does not require a cash outlay
-value of someones time
-
question
Formula for Total Cost
Total cost=Explicit + Implicit costs
OR
Total cost= Fixed cost + Variable Cost
question
Efficient Scale
the quantity of output that minimizes average total cost
1 of 33
question
Production Function
Relationship between:
-quantity of inputs used to make a good
and
-the quality of output of that good
Gets flatter as production rises
question
Marginal Product
-Increase in output that arises from an additional unit of input
--other inputs constant
question
Marginal product of labor, MPL
MPL= change in Q / change in L
-If Jack hires one more worker, his output rises by the marginal product of labor
question
How are marginal product and production function related?
Can be seen as the Slope of the production function
question
Diminishing Marginal Product
-Marginal product of an input declines as the quantity of the input increases
-Production function gets flatter as more inputs are being used:
--The slope of the production function decreases
question
Why is MPL important
"Rational people think at the margin"
When farmer Jack hires an extra worker:
-His costs rise by the wage he pays the worker
-His output rises by the MPL
-Comparing them helps Jack decide whether he should hire the worker
question
Why MPL diminishes..
Farmer Jack's output rises by a smaller and smaller amount for each additional worker. Why?
-As Jack adds workers, the avg worker has less land to work with and will be less productive
-In general, MPL diminishes as L rises whether the fixed input is land or capital (equipment, machines, etc.)
question
Marginal Cost, MC
-Increase in total cost arising from an extra unit of production
-Marginal cost= Change in total cost / Change in quantity
-Increase in total cost from producing an additional unit of output
question
Formula for Marginal Cost
MC= change in Total cost/ change in Quantity
question
Fixed costs, FC
Costs that do not vary with the quantity of output produced
-For Farmer Jack, FC = \$1000 for his land
-Other examples: cost of equipment, loan payments, rent
question
Variable costs, VC
costs that vary with the quantity of output produced
-For Farmer Jack, VC=wages he pays workers
-Other example: cost of materials
question
Average Total Cost (ATC) formula
ATC= Total cost / Quantity
OR
ATC= AFC + AVC
question
Average Fixed Cost (AFC) formula
AFC= FC/Q
question
Average Variable Cost (AVC) formula
AVC= VC/Q
question
Does ATC lie above or below AVC?
ATC will be above AVC because AVC + AFC= ATC
question
Is AFC above or below ATC?
Below because FC are the same regardless of quantity sold and will always be decreased
question
How does Marginal Cost usually look on a graph?
Usually upward slow, may have a little downward slope initially
-the MC curve crosses the ATC curve at the ATC curve's minimum
question
When MC < ATC, ATC is...
falling
question
When MC > ATC, ATC is...
rising
question
Short Run
-Some inputs are fixed (e.g., factories, land)
-The costs of these inputs are Fixed Costs
question
Long Run
-All inputs are variable (e.g. firms can build more factories or sell existing ones)
question
In the long run..
ATC at any Q is cost per unit using the most efficient mix of inputs for that Q (e.g., the factory size with the lowest ATC)
question
Economies of scale
Average Total Cost falls as quantity increases
-Long run average total cost falls as the quantity of output increases
--increasing specialization among workers
--More common when Q is low
question
Constant returns to scale
ATC stays the same as Q increases
-Log run average total cost stays the same as the quantity of output changes
question
Diseconomies of scale
ATC rises as Q increases
-Increasing coordination problems in large organization
--e.g., management becomes stretched can't control costs
--More common when Q is high
question
Formula for Economic Profit
Economic Profit=Total revenue - Total cost (including explicit and implicit costs)
question
Formula for Accounting Profit
Total revenue - total explicit costs
question
Is Accounting or Economic profit higher?
Accounting profit because it ignores implicit costs
question
Formula for total revenue
TR= P x Q
question
Explicit Costs
Require an outlay of money-
-rent
-inputs for production
-paying wages to workers
question
Implicit Costs
-Does not require a cash outlay
-value of someones time
-
question
Formula for Total Cost
Total cost=Explicit + Implicit costs
OR
Total cost= Fixed cost + Variable Cost
question
Efficient Scale
the quantity of output that minimizes average total cost

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