Ch10 - Chapter 10: Output and Costs I. Decision Time Frames...

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C h a p t e r 1 0 : O u t p u t a n d C o s t s I. Decision Time Frames A. The firm makes many decisions in order to achieve its main objective: profit maximization . 1. Some decisions are relatively critical to the survival of the firm, or are irreversible (or very costly to reverse). 2. Other decisions are easily reversible or are much less critical to the survival of the firm (but still influence profitability). B. The Short Run 1. The short run is a time frame in which the quantity of at least one factor of production is fixed. 2. Some factors used by the firm are fixed in quantity (such as technology, buildings, capital) in the short run. This set of factors is called the firm’s plant . In the short run, a firm’s plant is fixed . 3. Other factors used by the firm vary with output (such as labor, raw materials, energy). In the short run, to increase output the firm must increase the quantity of variable factors it uses. C. The Long Run 1. The long run is a time frame in which the quantities of all factors of production can be varied. This means that the firm can change its plant size, as well as the quantity of all its other factors in the long run. 2. Long-run decisions are not easily reversed. 3. Sunk costs are costs incurred by the firm and cannot be changed. The firm’s investment in its plant is a sunk cost. Sunk costs are irrelevant to a firm’s decisions. II. Short-Run Technology Constraint A. To increase output in the short run, a firm must increase the quantity of labor employed. B. Product Schedules Three concepts describe the relationship between output and the quantity of labor employed. 1. Total product , which is the maximum output that a given quantity of labor can produce. 2. Marginal product of labor, which 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. 3. Average product of labor, which equals total product divided by the quantity of labor employed. 4. Table 10.1 shows an example of total product, marginal product, and average product for a firm that produces sweaters. C. Product Curves Produce curves are graphs of the three product concepts that show how total product, marginal product, and average product change as the quantity of labor employed changes. D. Total Product Curve The total product curve shows how the total product increases with the level of labor employed. 1. Figure 10.1 shows a total product curve. 2. The total product curve becomes steeper as employment increases at low levels of employment but the curve becomes less steep as employment continues to increase.
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2 3 0 3. The total product curve is similar to the PPF because it separates attainable output levels from unattainable output levels in the short run. E. Marginal Product Curve
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Ch10 - Chapter 10: Output and Costs I. Decision Time Frames...

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