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econ ch 8 outline

econ ch 8 outline - Kristin Chen Econ CH 8-Behind the...

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Kristin Chen Econ CH 8—Behind the Supply Curve: Inputs & Costs 1. The Production Function a. = relationship between the quantity of inputs a firm uses & the quantity of output it produces b. Inputs & outputs i. Fixed input = an input whose quantity is fixed and cannot be varied ii. Variable input =an input whose quantity the firm can vary iii. Long run = time period in which all inputs can be varied iv. Short run = time period in which at least 1 input is fixed v. Total product curve shows how the quantity of output depends on the quantity of the variable input for a given quantity of fixed input 1. Changing slope reflects the marginal product [the additional quantity of output from using one more unit of labor] 2. Upward sloping 3. Flattens as quantity increases due to diminishing returns to input in production (the marginal product of an input falls as more of that input is used if the quantities of other inputs are fixed) vi. MPL = ∆Q/∆L : Marginal product of labor = ∆ in quantity of output ∆ in quantity of labor vii. Diminishing returns to an input = when an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input 2. Cost Curves a. Fixed cost [ FC ]= cost that does not depend on the quantity of output produced i. cost of fixed input ii. “overhead cost” b. variable cost [ VC ]= cost that depends on the quantity of output produced i. cost of variable input c. total cost [ TC ] = fixed cost + variable cost d. TC = FC + VC e. Total cost curve = shoes how total cost depends on the quantity of output i. Upward sloping 3. Marginal Cost & Average Cost a. Marginal cost = change in total cost generated by producing one more unit of output i. MC = ∆TC/∆Q ii. Equal to the slope of the total cost curve iii. As output increases, the marginal cost of output also increases b/c the marginal product of the variable input is falling iv. Tells the producer how much one more unit of output costs to produce b. Average total cost = average cost i.
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