Chapter Outline - Ch.8 - 10-31-07

Chapter Outline - Ch.8 - 10-31-07 - Microeconomics Chapter...

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Microeconomics – Chapter 8 Outline – 10/31/07 CHAPTER #8 - Costs and the Changes at Firms over Time Total costs – The sum of variable costs and fixed costs Fixed costs – Costs of production that do not depend on the quantity of production. Variable costs – Costs of production that vary with the quantity of production - Fixed costs are the part of total costs that do not vary with the amount produced in the short run, which include the cost of factories, land, machines, and all other things that do not change when production changes in the short-run . - Variable costs include wage payments for workers, gasoline for trucks, and other things that change when the amount produced changes. Remember, TC = FC + VC The Short Run and the Long Run Short run – The period of time during which it is not possible to change all inputs to production; only some inputs, such as labor, can be changed. Long run – Long enough that all inputs, including capital can be changed. The minimum period of time during which all inputs to production can be changed. Costs Variable costs increase with output Variable costs are shown by the distance between the total costs curve and the fixed costs curve. Marginal Cost Marginal cost – The change in total costs due to a one-unit change in quantity produced. Average Cost Average total cost (ATC) – Total costs of production divided by the quantity produced (also called cost per unit). Cost/unit Average variable cost (AVC) – Variable costs divided by the quantity produced Average fixed cost (AFC) – Fixed costs divided by the quantity produced. We use the average total cost most frequently
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o The other two are important for knowing whether to shut down a firm or keep it open when it is losing money Costs Depend on the Firm’s Production Function Cost information is determined by how much input of labor and capital it takes to produce output and by the price of capital and labor. The Production Function Production function – A relationship that shows the quantity of output for any given amount of input. Marginal product of labor – Change in production that can be obtained with an additional unit of labor. o Decreasing marginal product of labor is called diminishing returns to labor . Increasing marginal product of labor is called increasing returns to labor . For low levels of labor input, the marginal product of labor increases: Output increases by more from a given change in labor input as labor increases o At low levels of production, increasing marginal product of labor is a possibility because the firm’s capital can be better utilized. Marginal product of labor Marginal cost Increasing Decreasing Decreasing Increasing Average product of labor – The quantity produced divided by the amount of labor input o Quantity produced  Total product o Average product of labor = (Q / L); where Q is total product and L is labor input Review Costs depend on the firm’s production function.
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This note was uploaded on 04/15/2008 for the course ECON 100 taught by Professor Stephaniemartin during the Fall '07 term at Allegheny.

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Chapter Outline - Ch.8 - 10-31-07 - Microeconomics Chapter...

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