chapterten - Ch. 10 Output and Costs *See Book* Decision...

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Ch. 10 Output and Costs *See Book* Decision Time Frames - The biggest decision that any firm makes is what industry to enter. Depends on background knowledge, interests and profit prospects. - Decisions about the quantity to produce and the price to charge depend on the type of market in which the firm operates. - The actions that a firm can take to influence the relationship between output and cost depend on how soon the firm wants to act. - The short run : a time frame in which the quantities of some resources are fixed. For most firm’s technology, buildings, and equipment. The management organization is also fixed in the short run. The collection of fixed resources is called the firm’s plant . - To increase output in the short run, a firm must increase the quantity of variable inputs it uses. Labor is usually the variable input. Also more hours. - Short-run decisions are easily reversed. - The long run : a time frame in which the quantities of all resources can be varied. The long run is a period in which the firm can change its plant. To increase the output in the long run, a firm is able to choose whether to change its plant as well as whether to increase the quantity of labor it hires. - Long-run decisions are not easily reversed. Once a plant decision is made, the firm usually must live with it for some time. The past cost of buying a plant that has no resale value is called a sunk cost . A sunk cost is irrelevant to a firm’s decisions. The only costs that influence its decisions are the short-run cost of changing its labor inputs and the long-run cost of changing its plant. Short-Run Technology Constraint - The relationship between output and the quantity of labor employed is described with three related concepts: o 1. Total product o 2. Marginal product o 3. Average product - Product Schedules o Total product is the maximum output that a given quantity of labor can produce. Each increase in employment brings an increase in total product. o Marginal product of labor is the increase in total product that results from a one- unit increase in the quantity of labor employed with all other inputs remaining the same. o Average product of labor is equal to total product divided by the quantity of labor employed. o As employment increases, marginal product at first increases and then begins to decrease. o Also average product at first increases and then decreases. - Product Curves: graphs of the relationships between employment and the three product concepts. They show how total product, marginal product, and average product change as employment changes and their relationships amongst each other. o Total Product Curve
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Similar to the production possibilities frontier. Separates the attainable output levels from those that are unattainable. Only the points on the total product are technologically efficient.
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chapterten - Ch. 10 Output and Costs *See Book* Decision...

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