DOC PREVIEW
UB ECO 182 - Chapter 11

This preview shows page 1-2-3-4-29-30-31-32-59-60-61-62 out of 62 pages.

Save
View full document
Premium Document
Do you want full access? Go Premium and unlock all 62 pages.
Access to all documents
Download any document
Ad free experience

Unformatted text preview:

11 OUTPUT AND COSTS After studying this chapter you will be able to Distinguish between the short run and the long run Explain and illustrate a firm s short run product curves Explain and derive a firm s short run cost curves Explain and derive a firm s long run average cost curve 2014 Pearson Addison Wesley What do McDonald s and Campus Sweaters a small producer of knitwear that we ll study in this chapter have in common Like every firm they must decide How much to produce How many people to employ How much and what type of capital equipment to use How do firms make these decisions 2014 Pearson Addison Wesley 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 2014 Pearson Addison Wesley Decision Time Frames The Short Run The short run is a time frame in which the quantity of one or more resources used in production is fixed For most firms the capital called the firm s plant is fixed in the short run Other resources used by the firm such as labor raw materials and energy can be changed in the short run Short run decisions are easily reversed 2014 Pearson Addison Wesley Decision Time Frames The Long Run 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 by the firm and cannot be changed If a firm s plant has no resale value the amount paid for it is a sunk cost Sunk costs are irrelevant to a firm s current decisions 2014 Pearson Addison Wesley 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 1 Total product 2 Marginal product 3 Average product 2014 Pearson Addison Wesley Short Run Technology Constraint 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 2014 Pearson Addison Wesley Short Run Technology Constraint Table 11 1 shows a firm s product schedules As the quantity of labor employed increases Total product increases Marginal product increases initially but eventually decreases Average product decreases 2014 Pearson Addison Wesley Short Run Technology Constraint Product Curves Product curves show how the firm s total product marginal product and average product change as the firm varies the quantity of labor employed 2014 Pearson Addison Wesley Short Run Technology Constraint Total Product Curve Figure 11 1 shows a total product curve The total product curve shows how total product changes with the quantity of labor employed 2014 Pearson Addison Wesley Short Run Technology Constraint The total product curve is similar to the PPF It separates attainable output levels from unattainable output levels in the short run 2014 Pearson Addison Wesley Short Run Technology Constraint Marginal Product Curve Figure 11 2 shows the marginal product of labor curve and how the marginal product curve relates to the total product curve The first worker hired produces 4 units of output 2014 Pearson Addison Wesley Short Run Technology Constraint The second worker hired produces 6 units of output and total product becomes 10 units The third worker hired produces 3 units of output and total product becomes 13 units And so on 2014 Pearson Addison Wesley Short Run Technology Constraint The height of each bar measures the marginal product of labor For example when labor increases from 2 to 3 total product increases from 10 to 13 so the marginal product of the third worker is 3 units of output 2014 Pearson Addison Wesley Short Run Technology Constraint To make a graph of the marginal product of labor we can stack the bars in the previous graph side by side The marginal product of labor curve passes through the mid points of these bars 2014 Pearson Addison Wesley Short Run Technology Constraint Almost all production processes are like the one shown here and have Increasing marginal returns initially Diminishing marginal returns eventually 2014 Pearson Addison Wesley Short Run Technology Constraint Increasing Marginal Returns Initially the marginal product of a worker exceeds the marginal product of the previous worker The firm experiences increasing marginal returns 2014 Pearson Addison Wesley Short Run Technology Constraint Diminishing Marginal Returns Eventually the marginal product of a worker is less than the marginal product of the previous worker The firm experiences diminishing marginal returns 2014 Pearson Addison Wesley Short Run Technology Constraint Increasing marginal returns arise from increased specialization and division of labor Diminishing marginal returns arises because each additional worker has less access to capital and less space in which to work Diminishing marginal returns are so pervasive that they are elevated to the status of a law The law of diminishing returns states that As a firm uses more of a variable input with a given quantity of fixed inputs the marginal product of the variable input eventually diminishes 2014 Pearson Addison Wesley Short Run Technology Constraint Average Product Curve Figure 11 3 shows the average product curve and its relationship with the marginal product curve When marginal product exceeds average product average product increases 2014 Pearson Addison Wesley Short Run Technology Constraint When marginal product is below average product average product decreases When marginal product equals average product average product is at its maximum 2014 Pearson Addison Wesley Short Run Cost To produce more output in the short run the firm must employ more labor which means that it must increase its costs Three cost concepts and three types of cost curves are Total cost Marginal cost Average cost 2014 Pearson Addison Wesley Short Run Cost Total Cost A firm s total cost TC is the cost of all resources used Total fixed cost TFC is the


View Full Document

UB ECO 182 - Chapter 11

Documents in this Course
Load more
Download Chapter 11
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view Chapter 11 and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Chapter 11 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?