Micro: Short Run and Long Run

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technology

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the processes a firm uses to produce outputs of goods and service

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positive technological change

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able to produce more output using the same inputs or even less inputs

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short run

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period of time when at least one of the firm's inputs is fixed

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long run

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period of time when a firm is able to vary all its inputs and can adopt new technology and increase/decrease the size of its physical plant

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total cost

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cost of all the inputs a firm uses in production

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fixed cost

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fixed inputs, remain constant as output changes
ex: payments for factory/retail space, insurance, advertising

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variable cost

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change as output changes
ex: labor costs, raw materials, electricity/utilities

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explicit cost

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when a firm spends money

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implicit cost

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when a firm experiences a non-monetary opportunity cost
ex: Money taken out to start a business

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Economic depreciation

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the difference between what is paid for your capital at the beginning of the year compared to what you would receive if you sold the capital at the end of the year

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economic costs

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explicit and implicit

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accounting costs

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just explicit

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in the short run, you can only increase or decrease output by

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increasing or decreasing a variable cost (number of workers)

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production function

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the relationship between the inputs employed by a firm and the maximum output it can produce with them

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average total cost

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total cost divided by the quantity of output produced

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average total cost

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makes a u shape

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marginal product of labor

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additional output a firm produces as a result of hiring one more worker
calculated by determining how much total output increases as each additional worker is hired

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increase in marginal product of labor results from

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the division of labor and from specialization

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the law of diminishing returns

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adding more of a variable input to the same amount of a fixed input will eventually cause the marginal product of the variable input to decline

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level of total output declines

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happens when the marginal product is negative

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production increases at a decreasing rate

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when the point of diminishing returns is reached

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average product of labor

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total output divided by the quantity of workers

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whenever the marginal product of labor is greater than the average product of labor

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the average product of labor must be increasing

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the marginal product of labor and the average product of labor are equal

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the quantity of workers for which the average product of labor is at its maximum

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marginal cost

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the change in a firm's total cost from producing one more unit
calculated by dividing the change in total cost by the change in output

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cause of the u shape

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the marginal cost decreases, and then increases again

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the marginal product of labor is rising

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the marginal cost of output is falling (and vice versa)

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average total cost will rise (and vice versa)

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as long as marginal cost is above average total cost

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average fixed cost

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calculated by dividing fixed cost by the quantity of output produced (same with variable cost)

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average total cost

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sum of average fixed cost and average variable cost

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minimum points

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where the marginal cost curve intersects the average variable cost curve

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long-run average cost curve

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shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed. Can be used for planning because they show the effect on cost of expanding output

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economies of scale

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the firm's long-run average costs fall as it increases the quantity of output it produces

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has lower average costs

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larger factories

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reasons for economies of scales:

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Firm's technology may make it possible to increase production with a smaller proportional increase in at least 1 input
Both workers and managers can become more specialized
Large firms may be able to purchase inputs at a lower cost
As a firm expands, it may be able to borrow money at a lower interest rate

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continue indefinitely

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economies of scales does not

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constant returns to scale

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as firms increase their output, they increase their input proportionally

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minimum efficient scale

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the level of output at which all economies of scale are exhausted

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diseconomies of scale

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a firm's long-run average costs rise as the firm increases output

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over time, most firms will build factories/stores that are

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at least as large as the minimum efficient scale but not so large that diseconomies of scale occur

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maximize profit

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goal for the seller

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3 problems to solve to maximize profit

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how to make the product, what the cost of making the product, and how much the seller can get for the product in the markets
quantity, related cost, revenue

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maximum

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marginal product will always intersect the average product when the average product is at aa

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negative marginal cost slope

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labor specialization

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positive marginal cost slope

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diminishing returns

1 of 45

question

technology

answer

the processes a firm uses to produce outputs of goods and service

question

positive technological change

answer

able to produce more output using the same inputs or even less inputs

question

short run

answer

period of time when at least one of the firm's inputs is fixed

question

long run

answer

period of time when a firm is able to vary all its inputs and can adopt new technology and increase/decrease the size of its physical plant

question

total cost

answer

cost of all the inputs a firm uses in production

question

fixed cost

answer

fixed inputs, remain constant as output changes
ex: payments for factory/retail space, insurance, advertising

question

variable cost

answer

change as output changes
ex: labor costs, raw materials, electricity/utilities

question

explicit cost

answer

when a firm spends money

question

implicit cost

answer

when a firm experiences a non-monetary opportunity cost
ex: Money taken out to start a business

question

Economic depreciation

answer

the difference between what is paid for your capital at the beginning of the year compared to what you would receive if you sold the capital at the end of the year

question

economic costs

answer

explicit and implicit

question

accounting costs

answer

just explicit

question

in the short run, you can only increase or decrease output by

answer

increasing or decreasing a variable cost (number of workers)

question

production function

answer

the relationship between the inputs employed by a firm and the maximum output it can produce with them

question

average total cost

answer

total cost divided by the quantity of output produced

question

average total cost

answer

makes a u shape

question

marginal product of labor

answer

additional output a firm produces as a result of hiring one more worker
calculated by determining how much total output increases as each additional worker is hired

question

increase in marginal product of labor results from

answer

the division of labor and from specialization

question

the law of diminishing returns

answer

adding more of a variable input to the same amount of a fixed input will eventually cause the marginal product of the variable input to decline

question

level of total output declines

answer

happens when the marginal product is negative

question

production increases at a decreasing rate

answer

when the point of diminishing returns is reached

question

average product of labor

answer

total output divided by the quantity of workers

question

whenever the marginal product of labor is greater than the average product of labor

answer

the average product of labor must be increasing

question

the marginal product of labor and the average product of labor are equal

answer

the quantity of workers for which the average product of labor is at its maximum

question

marginal cost

answer

the change in a firm's total cost from producing one more unit
calculated by dividing the change in total cost by the change in output

question

cause of the u shape

answer

the marginal cost decreases, and then increases again

question

the marginal product of labor is rising

answer

the marginal cost of output is falling (and vice versa)

question

average total cost will rise (and vice versa)

answer

as long as marginal cost is above average total cost

question

average fixed cost

answer

calculated by dividing fixed cost by the quantity of output produced (same with variable cost)

question

average total cost

answer

sum of average fixed cost and average variable cost

question

minimum points

answer

where the marginal cost curve intersects the average variable cost curve

question

long-run average cost curve

answer

question

economies of scale

answer

the firm's long-run average costs fall as it increases the quantity of output it produces

question

has lower average costs

answer

larger factories

question

reasons for economies of scales:

answer

question

continue indefinitely

answer

economies of scales does not

question

constant returns to scale

answer

as firms increase their output, they increase their input proportionally

question

minimum efficient scale

answer

the level of output at which all economies of scale are exhausted

question

diseconomies of scale

answer

a firm's long-run average costs rise as the firm increases output

question

over time, most firms will build factories/stores that are

answer

at least as large as the minimum efficient scale but not so large that diseconomies of scale occur

question

maximize profit

answer

goal for the seller

question

3 problems to solve to maximize profit

answer

how to make the product, what the cost of making the product, and how much the seller can get for the product in the markets
quantity, related cost, revenue

question

maximum

answer

marginal product will always intersect the average product when the average product is at aa

question

negative marginal cost slope

answer

labor specialization

question

positive marginal cost slope

answer

diminishing returns

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Micro: Short Run and Long Run

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