Chapter 6 Notes

Chapter 6 Notes - Chapter 6: Production and Cost Business...

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Chapter 6: Production and Cost Business firm an organization owned and operated by private individuals. Specializes in production Production is the process of combining inputs to make goods and services Technology is the method of combining inputs to produce goods or services The production function indicates the maximum amount of output a firm can produce over some period of time from each combination of inputs Short-Run vs. Long-Run Decisions o Long run a time horizon long enough for a firm to vary all its inputs. Variable inputs can be adjusted up or down as the quantity of output changes o Short run a time period during which at least one of the firm’s inputs is fixed. Fixed inputs cannot be adjusted s output changes in the short run Production in the Short-Run o Total product maximum quantity of output that can be produced from a given combination of inputs o Marginal product of labor: MPL = Q/ L (additional output produced when one more worker is hired) Increasing marginal returns to labor MPL increases as more labor is hired Diminishing marginal returns to labor MPL decreases as more labor is hired 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 Costs o Total Cost the opportunity cost of the owners (everything they must give up in order to produce that amount of output)
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o Sunk Cost a cost that has been paid or must be paid, regardless of any future action being considered. Should not be considered when making
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This note was uploaded on 02/04/2011 for the course ECON 011 taught by Professor Yezer during the Fall '07 term at GWU.

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Chapter 6 Notes - Chapter 6: Production and Cost Business...

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