CN_intromicro_ch10

CN_intromicro_ch10 - 1 Chapter 10 The Short Run Vs. The...

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Unformatted text preview: 1 Chapter 10 The Short Run Vs. The Long Run Short Run A time horizon during which at least one of the firms inputs cannot be varied. (Generally, this is capital) The short run is characterized by 2 types of inputs resulting in 2 types of costs. (variable and fixed) Long Run A time horizon long enough for a firm to be able to vary all of its inputs. The long run is characterized by only 1 type of input resulting in 1 type of cost (only variable). In the Short Run Production Fixed Input An input whose quantity must remain constant regardless of how much output is produced. Variable Input An input whose usage changes as the level of output changes. Production Function Function that describes the relationship between inputs and out- put. Table 1: Simple Production Function Labor (L) Output (Q) 1 1 2 3 3 6 4 7 2 Marginal Product of Labor ( MP L ) The change in output brought about by a one- unit change in Labor. Using the information in Table ?? we can calculate the Marginal Productivity of Labor by subtracting the old output from the new output. This gives us Table ?? . MP L = Q L Table 2: Marginal Product of Labor Labor (L) Output (Q) MP L 1 1 1 2 3 2 3 6 3 4 7 1 3 Increasing Marginal Returns to Labor The marginal product of labor increases as more labor is hired. This is generally due to gains from specialization. In the above example the firm experiences increasing returns to labor for the 1 st and 2 nd units. Diminishing Marginal Returns to Labor The marginal product of labor decreases as more labor is hired. In the above example the firm experiences diminishing returns to labor from the 4 th unit of labor onward. Law of Diminishing Marginal Returns As more and more of any input is added to a fixed amount of other inputs, its marginal product will eventually decline. (Note: This is similar to the law of diminishing marginal utilities.) Costs Total Fixed Cost (FC) Cost associated with all fixed inputs. The price of the fixed input times the amount of the fixed input used. In the case of capital the price capital is referred to as the rental rate (r). FC = rK Total Variable Cost (VC) Cost associated with all variable inputs. The price of the variable input times the amount of the variable input used. In the case of labor the price of labor is referred to as the wage (w). VC = wL Total Cost (TC) The sum of all costs. TC = FC + VC Average Fixed Cost (AFC)...
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CN_intromicro_ch10 - 1 Chapter 10 The Short Run Vs. The...

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