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445 Ch 4 - When marginal cost is less than average cost an...

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4.1 Production Technology and Cost Functions for Single Product Firm Average Cost:  a measure of the expenditure per unit of production and is given by total  cost divided by total output.  Marginal Cost:  the addition to total cost that is incurred in increasing output by one unit.  Sunk Cost:  unlike  fixed costs  which are incurred every period ,   sunk costs  is a cost  that is incurred just once- typically a prerequisite to enter a market.  4.1.2 Cost Variables and Output Decisions Average Cost  is relevant to whether the firm will produce positive output in the long run,  and the concept of  average variable cost  is relevant to whether the firm will produce  positive output in the short run.  Marginal Cost  is relevant to how much output the firm will produce given that it chooses  to produce a positive amount.  4.1.3 Costs and Market Structure
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Unformatted text preview: When marginal cost is less than average cost, an expansion of output will lead to a reduction in average cost. When marginal cost is greater than average cost, an expansion of output will lead to an increase in average cost. Diseconomies of Scale Minimum Efficient Scale: the lowest level of output at which economies of scale are exhausted, S=1 When Elasticity of Demand =1, the total consumer expenditure for the product is constant. 4.2 Sunk Cost and Market Structure if there are positive sunk costs associated with entry, then firms must earn positive profits in each subsequent period of actual operation to cover those entry costs. Firms will stop entering the industry when the profit from operating each period covers the initial sunk cost that entry requires....
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