Microeconomics-chapter11.pptx - Microeconomics ELEVENTH EDITION Michael Parkin Chapter 11 Output and Costs Decisions Time Frames The firm makes many

Microeconomics-chapter11.pptx - Microeconomics ELEVENTH...

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Microeconomics ELEVENTH EDITION Michael Parkin Chapter 11 Output and Costs
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Decisions 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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Decisions 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 labour, raw materials, and energy) can be changed in the short run . Short-run decisions are easily reversed .
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Decisions 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 that has already been incurred and cannot be recovered. If a firm’s plant has no resale value (the trade value of any good that has been purchased), the amount paid for it is a sunk cost. Sunk costs are irrelevant to a firm’s current decisions . The only costs that influence its current decisions are the short-run cost of changing its labor cost and the long-run cost of changing its plant.
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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: Total product Marginal product Average product These product concepts can be illustrated either by product schedule or by product curves .
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Short-Run Technology Constraint Product Schedule 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.
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Short-Run Technology Constraint The table shows a firm’s product schedules . As the quantity of labor employed increases : Total product increases. Marginal product increases initially but eventually decreases. Average product increases initially but eventually decreases .
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Short-Run Technology Constraint Total Product Curve The next figure shows a total product curve. The total product curve shows how total product changes with the quantity of labor employed.
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Short-Run Technology Constraint The total product curve is similar to the PPF.
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  • Winter '17
  • Dr. bashar
  • Microeconomics, Marginal product, Economics of production, Cost curve

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