Chapter 20 part 2

Chapter 20 part 2 - Production and Costs Chapter 20 Part 2...

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Unformatted text preview: Production and Costs Chapter 20 Part 2 Production defined: Production is the creation of value. Activity that enhances the value of inputs in some way. If the processes create losses, then the activity would have to be considered as consumption, not production. For instance, if recycling results in losses, then consumption of resources; or if a father employs an incompetent son, then engaging in consumption, not production. Consumption , correctly understood, is the extermination of value. Savings: the surplus of production over consumption The Short Run vs Long Run Short run (in production): A time period so short that a firm is unable to vary some of its inputs. The firms plant size typically cannot be altered in the short run. Hence, some costs are considered fixed. Long run (in production) A time period long enough to allow the firm to vary all of its factors of production. In this case, the industry has time to fully adjust to changes, including the plant size. Example: Short runa lobsterman buys more traps. Categories of Costs To help describe the relationship between cost and the level of output in a typical production process. In the short run, two categories: fixed & variable Total fixed cost (TFC): Average fixed cost (AFC): TFC/q [q=output] Total variable cost (TVC): Average variable cost (AVC): TVC/q Average total cost (ATC): TC/q or ATC + AFC Marginal cost (MC): TC/q Output and costs in the short run General characteristics of the relationship between output and various categories of costs: Output Output Output Cost per unit Average fixed cost AFC Marginal Cost MC Average Total cost ATC High AFC High MC Lowest cost per unit Law of Diminishing Returns As more of a variable input is combined with a fixed input , eventually the increase in output will diminish....
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Chapter 20 part 2 - Production and Costs Chapter 20 Part 2...

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