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# ch10 - Output and Costs Decision Time Frames To study the...

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Chapter 10 Output and Costs Decision Time Frames To study the relationship between a firm’s output decision and its costs, we use two decision time frames: o The short run o The long run The short run is a time frame in which the quantities of some resources are fixed. Short-run decisions are easily reversed. The long run is a time frame in which the quantities of all resources can be varied. Long-run decisions are not easily reversed because once a plant decision is made the firm usually must live with it for some time. We call the past cost of buying a plant that has no resale value a sunk cost . Short-Run Technology Constraint Total product is the total output produced. The total product curve separates what is attainable from what is unattainable. The marginal product of labour is the increase in total product that results from a one-unit increase in the quantity of labour employed with all other inputs remaining the same. Marginal product increases and then diminishes. Diminishing marginal returns occur when the marginal product of an additional worker is less than the marginal product of the previous worker. The law of diminishing returns states that: o As a firm uses more of a variable input, with a given quantity of fixed inputs, the marginal product of the variable input eventually diminishes. All production processes eventually reach a point of diminishing marginal returns. The average product of labour is equal to total product divided by the quantity of labour employed.

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Figure 10.3 shows the average product curve and the marginal product curve.
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