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test reveiw 2 - Chapter 6-Production function tells you...

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Chapter 6 -Production function- tells you maximum amount/ output that can be produced at a given level of input -some fixed inputs- 2 year lease, sophisticated machines that take 2 years to build -ones you can change are variable – workers, cost Short run- period of time when at least one of your inputs will be fixed—firms can only move along the current ATC curve- in the long run they can move from one ATC curve to another by varying the size of the plant Long run- period when all costs are variable Costs- implicit/ explicit Total product- max amount of output that can be produced given your input- goes up as you increase output Marginal product- change total product Change in labor Law of diminishing returns- if you increase amount of input while holding other inputs constant you will see marginal production of each added variable input will start decline MC- change in total cost total cost-= TFC + TVC Change in quantity MC- first declines then raises- when MP increases at a increasing rate MC decreases but when law of diminishing returns kicks in then MC decreases AFC- TFC always decreases as output AVC TVC n increase-1 st decrease g Q rises Q Marginal decrease average decrease—if the marginal is below the average then it is pulled down LRATC U shaped--- if output increase the AC/Unit decreases Why? Specialization- small company- will have to do everything- Lumpy inputs- indivisible inputs like washer and dryers LRATC increases b/c economies of scale- when companies become larger there are inefficiencies in management and buis and cost increase---- MPL- marginal production of labor- tells us the rise in output produced when you introduce one more worker MPL change quantity Change in labor Firms total cost of production- is the opportunity cost of the owners--- everything that they are giving up to produce that amount of output -cant count the sunk costs- costs that has been paid or must be paid regardless of future action
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Explicit costs; Implicit Costs; Rent paid out op cost of – owners land, building, money, time Interest on loans Managers salaries Raw materials Diseconomies of scale- lRATC increases as output increases Constant returns of scale- LRATC unchanged as output rises Chapter 7 Profit- reward for taking a risk and innovation TR= price x quantity Short run operating because it has a fixed cost- total cost starts at something other than 0 MC- change total cost MR- change TR Change output change in quantity MR decreases when the # of goods produced increases- b/c the more # decreases the value of all goods + when output increases and revenue increases - when output increases and revenue decreases Equal to the slope of the TR curve MC- decreases then increases U b/c law of diminishing returns Profit Marginal Approach- mR and MC -- 2 nd
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