UNIT 3: The Production Function - Custom Scholars
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# UNIT 3: The Production Function

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Production Function
The way a firm combines a certain number of inputs to produce a certain number of outputs.
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Type of Input: Fixed Input
A type of input that CANNOT be changed in the short run.
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Type of Input: Variable Input
A type of input that CAN be changed in the short run.
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Short Run
The period of time in which there are fixed inputs.
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Long Run
The period of time long enough in which the firm can change its number of input.
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Total Product
The total number of outputs produced by a firm by a certain number of inputs.
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Marginal Product: Definition
The additional number of output per increase of a unit of a variable input.
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Marginal Product: Equation
change in total product/change in inputs (labor)
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Average Product: Definition
The average number of output produced by one unit of a variable input
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Average Product: Equation
total product/labor
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Why does Marginal Product increases initially?
There is specialization, for example, division of labor.
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Why does Marginal Product decreases after an initial increase?
There is the law of diminishing returns. We add more and more of the variable inputs to a fixed number of input, therefore, specialization won't occur.
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Marginal Product represents the _________ of the Total Product.
Slope
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When Marginal Product is above the Average Product, Average Product is _____________. When Marginal product is below the Average Product, Average Product is _______________.
Increasing; Decreasing.
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Production Costs in the Short Run: Fixed Costs
A type of cost that have to be paid even though there's no outputs. For instance, rent.
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Production Costs in the Short Run: Variable Costs
A type of cost that changes as output changes. For instance, labor.
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Production Costs in the Short Run: Total Costs Equation
Fixed costs + Variable Costs
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Marginal Costs: Definition
The additional cost of producing one more unit of output.
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Marginal Costs: Equation
The change in total costs/change in inputs
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Marginal Costs are dependent with Marginal product. It also _____________ initially due to _______________ then suddenly _______________ due to _____________.
Decreases; Specialization; Increase; The law of Diminishing Returns
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Average Fixed Cost, Average Variable Cost, Average Total Cost: Definitions
The average additional cost per fixed/variable/total cost for a given quantity of output.
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Average Fixed Cost, Average Variable Cost, Average Total Cost: Equations
FC/Q; VC/Q; TC/Q; AVC plus AFC is ATC
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Why would the short run marginal cost initially decrease?
There's at least one fixed input that can be shared by specialization.
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In a graph, what is always happening with the Average Fixed Cost?
It is ALWAYS decreasing.
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In a graph, what is always happening with the Average Variable Cost and Average Total Cost? What is the reason for it?
It is u-shaped. ATC falls as fixed costs are spread over more units of output then it will be affected by the downward pressure of the diminishing returns.
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What is the relationship between MC and ATC? MC and AVC
MC above ATC, ATC increases; MC above AVC, AVC increases.
MC below ATC, ATC decreases; MC below AVC, AVC decreases.
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What does a decreasing AFC tells us?
The difference between ATC and AVC is smaller, or the graphs are getting closer.
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Increasing Returns to Scale
The output increases at a faster rate than all inputs.

Example: Hiring two pizza workers, quadruples the number of output originally predicted.
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Decreasing Returns to Scale
The output is increasing at a slower rate than all inputs.

Example: Hiring two pizza workers, halves the number of output originally predicted.
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Constant Returns to Scale
The output is increasing at the same rate as all inputs.

Example: Hiring two pizza workers, the number of originally predicted is doubled.
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Economies of Scale
long run ATC decreases as output increases.
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Diseconomies of Scale
long run ATC increases as output increases.
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Constant Economies of Scale
long run ATC is constant as output increases.
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Minimum Efficient Scale
The capacity at which LRATC are minimized. The higher fixed costs, the higher MES.
1 of 34
question
Production Function
The way a firm combines a certain number of inputs to produce a certain number of outputs.
question
Type of Input: Fixed Input
A type of input that CANNOT be changed in the short run.
question
Type of Input: Variable Input
A type of input that CAN be changed in the short run.
question
Short Run
The period of time in which there are fixed inputs.
question
Long Run
The period of time long enough in which the firm can change its number of input.
question
Total Product
The total number of outputs produced by a firm by a certain number of inputs.
question
Marginal Product: Definition
The additional number of output per increase of a unit of a variable input.
question
Marginal Product: Equation
change in total product/change in inputs (labor)
question
Average Product: Definition
The average number of output produced by one unit of a variable input
question
Average Product: Equation
total product/labor
question
Why does Marginal Product increases initially?
There is specialization, for example, division of labor.
question
Why does Marginal Product decreases after an initial increase?
There is the law of diminishing returns. We add more and more of the variable inputs to a fixed number of input, therefore, specialization won't occur.
question
Marginal Product represents the _________ of the Total Product.
Slope
question
When Marginal Product is above the Average Product, Average Product is _____________. When Marginal product is below the Average Product, Average Product is _______________.
Increasing; Decreasing.
question
Production Costs in the Short Run: Fixed Costs
A type of cost that have to be paid even though there's no outputs. For instance, rent.
question
Production Costs in the Short Run: Variable Costs
A type of cost that changes as output changes. For instance, labor.
question
Production Costs in the Short Run: Total Costs Equation
Fixed costs + Variable Costs
question
Marginal Costs: Definition
The additional cost of producing one more unit of output.
question
Marginal Costs: Equation
The change in total costs/change in inputs
question
Marginal Costs are dependent with Marginal product. It also _____________ initially due to _______________ then suddenly _______________ due to _____________.
Decreases; Specialization; Increase; The law of Diminishing Returns
question
Average Fixed Cost, Average Variable Cost, Average Total Cost: Definitions
The average additional cost per fixed/variable/total cost for a given quantity of output.
question
Average Fixed Cost, Average Variable Cost, Average Total Cost: Equations
FC/Q; VC/Q; TC/Q; AVC plus AFC is ATC
question
Why would the short run marginal cost initially decrease?
There's at least one fixed input that can be shared by specialization.
question
In a graph, what is always happening with the Average Fixed Cost?
It is ALWAYS decreasing.
question
In a graph, what is always happening with the Average Variable Cost and Average Total Cost? What is the reason for it?
It is u-shaped. ATC falls as fixed costs are spread over more units of output then it will be affected by the downward pressure of the diminishing returns.
question
What is the relationship between MC and ATC? MC and AVC
MC above ATC, ATC increases; MC above AVC, AVC increases.
MC below ATC, ATC decreases; MC below AVC, AVC decreases.
question
What does a decreasing AFC tells us?
The difference between ATC and AVC is smaller, or the graphs are getting closer.
question
Increasing Returns to Scale
The output increases at a faster rate than all inputs.

Example: Hiring two pizza workers, quadruples the number of output originally predicted.
question
Decreasing Returns to Scale
The output is increasing at a slower rate than all inputs.

Example: Hiring two pizza workers, halves the number of output originally predicted.
question
Constant Returns to Scale
The output is increasing at the same rate as all inputs.

Example: Hiring two pizza workers, the number of originally predicted is doubled.
question
Economies of Scale
long run ATC decreases as output increases.
question
Diseconomies of Scale
long run ATC increases as output increases.
question
Constant Economies of Scale
long run ATC is constant as output increases.
question
Minimum Efficient Scale
The capacity at which LRATC are minimized. The higher fixed costs, the higher MES.

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