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2nd_Econ_Midterm_Review - 2nd Econ Midterm Review CHAPTER 6...

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2 nd Econ Midterm Review CHAPTER 6 o Productivity: output per unit of input (output/labor hour) o Productivity of any factor of production depends on the amount of other resources available to it o Production Function: technological relationship expressing the max output (quantity produced) attainable from different combinations of inputs (land, labor, capital) o Marginal physical product: change in total output that results from employment of one more unit of labor input. o Change in total output/change in input quantity o Law of diminishing returns: MPP of a variable input declines as more of it is employed with a given quantity of other fixed inputs. o Total output won’t keep rising if more people are hired—ratio of labor to factors of production, scarcity of land and capital o Short run: period in which quantity and quality of some inputs can’t be changed. Commitments to fixed inputs. Determines the limit to output and shows how much each worker contributes o Profit: total revenue- total cost o Economic cost of product determined by the value of the resources needed to produce it => resource requirement eventually increase o Marginal cost: increase in total cost associated with a one-unit increase in production o Change in total cost/ change in output o When MPP increases, MC decreases & vice versa o Short run: quantity and quality of land and capital are fixed, only vary in the intensity of their use => more or fewer workers o Total costs: market value of all resources used to produce a good or service. o Identify all resources used in production then add up o How fast TC rises only depends on variable costs o Fixed cost: costs of production that don’t change when the rate of output is altered (e.g. factory lease, sewing machine) o No way to avoid fixed costs in short run o Variable cost: costs of production that change when the rate of output is altered (e.g. labor and material costs) o Average total cost: total cost divided by the quantity produced. AFC+ AVC o U shaped (initial dominance of falling AFC but then overshadowed by rising AVC) o Lowest point on curve= minimum average cost. Minimize amount of land, labor, and capital per output. Least-cost production, lowest-cost product, lowest possible opportunity cost o Average fixed cost: total fixed cost/ quantity o L shaped, decreasing curve => costs spread over more output
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