UNIT 3: The Production Function

question

Production Function

answer

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

answer

A type of input that CANNOT be changed in the short run.

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Type of Input: Variable Input

answer

A type of input that CAN be changed in the short run.

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Short Run

answer

The period of time in which there are fixed inputs.

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Long Run

answer

The period of time long enough in which the firm can change its number of input.

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Total Product

answer

The total number of outputs produced by a firm by a certain number of inputs.

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Marginal Product: Definition

answer

The additional number of output per increase of a unit of a variable input.

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Marginal Product: Equation

answer

change in total product/change in inputs (labor)

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Average Product: Definition

answer

The average number of output produced by one unit of a variable input

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Average Product: Equation

answer

total product/labor

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Why does Marginal Product increases initially?

answer

There is specialization, for example, division of labor.

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Why does Marginal Product decreases after an initial increase?

answer

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.

answer

Slope

question

When Marginal Product is above the Average Product, Average Product is _____________. When Marginal product is below the Average Product, Average Product is _______________.

answer

Increasing; Decreasing.

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Production Costs in the Short Run: Fixed Costs

answer

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

answer

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

answer

Fixed costs + Variable Costs

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Marginal Costs: Definition

answer

The additional cost of producing one more unit of output.

question

Marginal Costs: Equation

answer

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 _____________.

answer

Decreases; Specialization; Increase; The law of Diminishing Returns

question

Average Fixed Cost, Average Variable Cost, Average Total Cost: Definitions

answer

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

answer

FC/Q; VC/Q; TC/Q; AVC plus AFC is ATC

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Why would the short run marginal cost initially decrease?

answer

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?

answer

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?

answer

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

answer

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?

answer

The difference between ATC and AVC is smaller, or the graphs are getting closer.

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Increasing Returns to Scale

answer

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

answer

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

answer

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

answer

long run ATC decreases as output increases.

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Diseconomies of Scale

answer

long run ATC increases as output increases.

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Constant Economies of Scale

answer

long run ATC is constant as output increases.

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Minimum Efficient Scale

answer

The capacity at which LRATC are minimized. The higher fixed costs, the higher MES.

1 of 34

question

Production Function

answer

The way a firm combines a certain number of inputs to produce a certain number of outputs.

question

Type of Input: Fixed Input

answer

A type of input that CANNOT be changed in the short run.

question

Type of Input: Variable Input

answer

A type of input that CAN be changed in the short run.

question

Short Run

answer

The period of time in which there are fixed inputs.

question

Long Run

answer

The period of time long enough in which the firm can change its number of input.

question

Total Product

answer

The total number of outputs produced by a firm by a certain number of inputs.

question

Marginal Product: Definition

answer

The additional number of output per increase of a unit of a variable input.

question

Marginal Product: Equation

answer

change in total product/change in inputs (labor)

question

Average Product: Definition

answer

The average number of output produced by one unit of a variable input

question

Average Product: Equation

answer

total product/labor

question

Why does Marginal Product increases initially?

answer

There is specialization, for example, division of labor.

question

Why does Marginal Product decreases after an initial increase?

answer

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.

answer

Slope

question

When Marginal Product is above the Average Product, Average Product is _____________. When Marginal product is below the Average Product, Average Product is _______________.

answer

Increasing; Decreasing.

question

Production Costs in the Short Run: Fixed Costs

answer

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

answer

A type of cost that changes as output changes. For instance, labor.

question

Production Costs in the Short Run: Total Costs Equation

answer

Fixed costs + Variable Costs

question

Marginal Costs: Definition

answer

The additional cost of producing one more unit of output.

question

Marginal Costs: Equation

answer

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 _____________.

answer

Decreases; Specialization; Increase; The law of Diminishing Returns

question

Average Fixed Cost, Average Variable Cost, Average Total Cost: Definitions

answer

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

answer

FC/Q; VC/Q; TC/Q; AVC plus AFC is ATC

question

Why would the short run marginal cost initially decrease?

answer

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?

answer

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?

answer

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

answer

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?

answer

The difference between ATC and AVC is smaller, or the graphs are getting closer.

question

Increasing Returns to Scale

answer

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

answer

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

answer

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

answer

long run ATC decreases as output increases.

question

Diseconomies of Scale

answer

long run ATC increases as output increases.

question

Constant Economies of Scale

answer

long run ATC is constant as output increases.

question

Minimum Efficient Scale

answer

The capacity at which LRATC are minimized. The higher fixed costs, the higher MES.

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UNIT 3: The Production Function

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