110Ch10 - Chapter 10: Output and Costs Objectives...

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Chapter 10: Output and Costs – Objectives Distinguish between the short run and the long run Explain the relationship between a firm’s output and labor employed in the short run Explain the relationship between a firm’s output and costs in the short run Derive and explain a firm’s short-run cost curves Explain the relationship between a firm’s output and costs in the long run Derive and explain a firm’s long-run average cost curve
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Decision 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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The Short Run and the Long Run The short run is a time frame in which the quantity of one or more resources used in production is fixed. The capital, called the firm’s plant , is fixed in the short run. In the short run, other resources (labor, raw materials, energy) can be changed and short-run decisions are easily reversed. 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 incurred that cannot be changed. If a firm’s plant has no resale value, its cost is a sunk cost.
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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
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Product Schedules 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. Product curves are graphs of the three product concepts that show how total product, marginal product, and average product change as the quantity of labor employed changes.
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Total, Marginal and Average Product
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The Total Product Curve The figure shows a total product curve. The total product curve shows how total product changes with the quantity of labor employed. The total product curve is similar to the PPF. It separates attainable output levels from unattainable output levels in the short run.
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The Marginal Product Curve The first worker hired produces 4 units of output. The second worker
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This note was uploaded on 05/21/2011 for the course ECON 110 taught by Professor Tan during the Spring '07 term at HKUST.

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110Ch10 - Chapter 10: Output and Costs Objectives...

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