Sooner or later equal increases in work effort

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- Sooner or later, equal increases in work effort eventually begin to add less and less to the total output This is called the division of labour An unchanging amount of physical capital the scope for such increases must eventually disappear, and sooner or later the marginal products of additional workers must decline The Average-Marginal relationship Are also expected to diminish If increasing quantities of a variable factor are applied to a quantity of fixed factors, the average product of the variable factors will eventually decrease The average product curve slopes upward as long as the marginal product curve is above it; Whether the marginal product curve is itself sloping upward or downward is irrelevant In order for the average product to rise when a new worker is added, the marginal product (the output of the new worker) must exceed the average product If the marginal is greater than the average, the average must be rising; if the marginal is less than the average, the average must be falling 7.4 Costs in the Short Run Defining Short-run costs Total Cost (TC) is the sum of all costs that the firm incurs to produce a given level of output. TC= TFC + TVC Total fixed cost (TFC) is the cost of the fixed factors (Capital) It is also referred to as overhead cost Total variable cost (TVC) is the cost of all variable factors with the level of output produced Rises and falls when output changes Average Total Cost (ATC) is the total cost of producing any given number of units of output divided by that number of units tells us the average total cost per unit of output ATC = Or ATC = AFC + AVC Average Fixed Costs (AFC) declines continually as output increases because of the amount of the fixed cost attributed to each unit of output falls. This is known as spreading overhead AFC = Average variable cost (AVC) first declines as output rises, reaches a minimum, and then increases as output continues to rise
AVC = Marginal Cost (MC) is the increase in total cost resulting from a one unit increase in the level of output Are always marginal variable costs because fixed costs do not change as output varies MC= Short run cost curves Short-run average total cost curves and are often U-shaped because average productivity increases at low levels of outputs but eventually declines sufficiently to offset advantages of spreading overheads. The outputs corresponding to the minimum point of a short-run average total cost curve is called the plant’s capacity MP and AP curves are both Hill-shaped (inverted U) AVC and MC curves are both U-shaped Since labour input adds directly to cost, the relationship between input and output – The AP and MP curves Closely linked to the relationship between output and cost – The AVC and MC curves When output per worker (AP) is rising, the variable cost per unit of output (AVC) is falling, and when output per worker (AP) is falling, average variable cost (AVC) is rising.

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