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Unformatted text preview: Chapter 10 Technology, Production, and Costs Chapter Summary In Chapter 9, we considered consumer decision making and the demand curve. In this chapter, we look at decisions of firms and the supply curve. The basic activity of a firm is to use inputs to produce goods and services using existing technology, where technology is defined as the process a firm uses to turn inputs into outputs. Firms separate the relationship between production and costs into the short run and long run. In the short run , the firm’s technology and physical plant are fixed, but other inputs (such as labor and raw materials) are variable. In the long run , the firm can vary the quantities of all inputs, adopt new technology, and change the size of its physical plant. Total cost is the cost of all the inputs used in production. In the short run, the costs of fixed inputs are fixed costs. Examples of fixed costs include lease payments on a store or warehouse or interest payments on a loan used to buy machinery and equipment. In the short run, the costs of variable inputs are variable costs . Examples of variable costs include the worker salaries and raw material. ) ( Cost Variable ) ( Cost Fixed ) ( Cost Total VC FC TC + = When a firm spends money on salaries or utility bills, it incurs an explicit cost or accounting cost. When a firm uses resources its owns—such as the time and talent of the owner—to produce goods, it incurs an implicit cost. Implicit costs are the nonmonetary opportunity costs of production. Economic costs include both accounting and implicit costs. The firm’s production function is the relationship between the inputs employed by the firm and the maximum output it can produce with those inputs. A short-run production function shows the relationship between the inputs and outputs where at least one of the inputs is fixed. The firm’s average total cost ( ATC ) equals the total cost divided by the quantity of output produced ( TC / Q ). Typically, ATC has a U- shape: Falling for low levels of output before rising at higher levels of output. In the short run, adding more and more of a variable input, such as labor, to the same amount of a fixed input, such as capital (such as machinery, equipment, or structures), will eventually cause the marginal product of labor to decline. This principle is called the law of diminishing returns . When only a small amount of the variable is being used, the marginal product of the variable input increases. This is caused by specialization and the division of labor. The marginal product of labor is the change in output that results from changing the number of workers hired. The average product of labor equals total output divided by the total number of workers hired. When the marginal product of labor is greater than the average product of labor, the average product increases, and when the marginal product of labor is less than the average product of labor, the average product of labor decreases. CHAPTER 10 | Technology, Production, and Costs...
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- Spring '08
- Decision Making