Ch10 - CHAPTER 1 0 Output and Costs After studying this...

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Output and Costs CHAPTER 10
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After studying this chapter you will be able to Distinguish between the short run and the long run Explain the relationship between a firm’s output and labor employed in the short run Explain the relationship between a firm’s output and costs in the short run and derive a firm’s short-run cost curves Explain the relationship between a firm’s output and costs in the long run and derive a firm’s long-run average cost curve
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Survival of the Fittest Size does not guarantee survival in business. Even large firms can disappear or get eaten up by other firms. Millions of small firms close down each year. What does a firm have to do to be a survivor? All firm have to decided how much to produce and how to produce it. How do firms make these decisions? This chapter studies a firm’s production possibilities and costs of production.
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Decision Time Frames The firm makes many decisions to achieve its main objective: profit maximization . Some decisions are critical to the survival of the firm. Some decisions are irreversible (or very costly to reverse). Other decisions are easily reversed and are less critical to the survival of the firm, but still influence profit. All decisions can be placed in two time frames: The short run The long run
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Decision Time Frames The Short Run The short run is a time frame in which the quantity of one or more resources used in production is fixed. For most firms, the capital, called the firm’s plant , is fixed in the short run. Other resources used by the firm (such as labor, raw materials, and energy) can be changed in the short run. Short-run decisions are easily reversed.
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Decision Time Frames The Long Run The long run is a time frame in which the quantities of all resources—including the plant size—can be varied. Long-run decisions are not easily reversed. A sunk cost is a cost incurred by the firm and cannot be changed. If a firm’s plant has no resale value, the amount paid for it is a sunk cost. Sunk costs are irrelevant to a firm’s decisions.
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Short-Run Technology Constraint To increase output in the short run, a firm must increase the amount of labor employed. Three concepts describe the relationship between output and the quantity of labor employed: 1. Total product 2. Marginal product 3. Average product
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Product Schedules Total product is the total output produced in a given period. The marginal product of labor is the change in total product that results from a one-unit increase in the quantity of labor employed, with all other inputs remaining the same. The average product of labor is equal to total product divided by the quantity of labor employed. Table 10.1
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This note was uploaded on 04/29/2009 for the course ECON 103 taught by Professor Holt during the Spring '08 term at George Mason.

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Ch10 - CHAPTER 1 0 Output and Costs After studying this...

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