Econ 201 1st Edition Lecture 13Outline of Last Lecture I. Utility and ConsumersII. Diminishing Marginal UtilityIII. Comparing Two Items by UtilityOutline of Current LectureI. Supply CurvesII. Marginal ProductsIII. Diminishing ReturnsIV. Average CostsV. Return to ScaleCurrent LectureBehind the Supply Curve: Inputs and Costs-Production is the process of turning inputs into outputs.-Inputs: building, land, labor, machine, human capital, etc-A production function is the relationship between the quantity of inputs a firm uses and the quantity of output it produces.-The total product (TP) curve shows how the quantity of output depends on the quantity of input.-The relationship between inputs and output is positive but not constant: marginal product of labor changes along the production function.Marginal Product of Labor-The marginal product of an input is the additional quantity of output that is produced by using one more unit of that input.MPL = Change in quantity of output DIVIDED BY Change in quantity of labor = ∆Q/∆L-MPL = change in quantity of output generated by one additional unit of labor.-What’s a unit?- The MPL is defined as the increase in the quantity of output when you increase the quantity of that input by one unit.- What do we mean by a unit of labor? Is it an additional hour of labor, an additional week, or a person-year?- The answer is that it doesn’t matter, as long as you are consistent.Diminishing Returns to Inputs-Marginal product initially rises as more workers are hired; then it declines.-Diminishing returns to inputs.- As output increases, the marginal product of the variable input declines.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Fixed Cost vs. Variable Cost-Fixed inputs:- an input whose quantity is fixed for a period of time and cannot be varied.- The costs of fixed inputs are called fixed cost.-Variable inputs:- an input whose quantity the firm can vary at any time- The costs of variable inputs are called variable costShort Run vs. Long Run-The short run - is the period in which at least one input is fixed.-The long run - is the period in which all inputs can be varied.Total Cost Curve-The total cost (TC) of producing a given quantity of output is the sum of the fixed cost (FC) and the variable cost (VC) of producing that quantity of output.TC = FC + VCMarginal Cost-The marginal cost is the change in total cost generated by one additional unit of output.MC = Change in total cost DIVIDED BY Change in quantity of output = ∆TC/∆QWhy is the Marginal Cost Curve Upward Sloping?-Because of the diminishing returns to inputs, more and more of the variable input must be used to produce each additional unit of output as the amount of output already produced rises.-And since each unit of the variable input must be paid for, the cost per additional unit of output also rises.Average Cost-Average total cost = total cost divided by quantity of output produced.ATC = TC/Q = Total cost/Q of output-Average fixed cost = the fixed cost per unit of output.AFC = = FC/Q = Fixed cost/Q of output-Average variable cost = the variable cost per unit of output.AVC = = VC/Q = Variable cost/Q of output-Increasing output has two opposing effects on average total cost:- The spreading effect: The larger the output, the more output over which fixed cost is spread, leading to lower average fixed cost.- The diminishing returns effect: The larger the output, the more variable input required to produce additional units, which leads to higher average variable cost.• MC is upward sloping because of diminishing returns.• AVC also is upward sloping but is flatter than the marginal cost curve.• AFC is downward sloping because of the spreading effect.• MC = ATC from below, crossing it at its lowest point.Short-Run versus Long-Run Costs-In the short run, many inputs are fixed-In the long run, all inputs are variable. This means that in the long run, fixed cost (like factory size) may also vary.-The firm will choose its fixed cost in the long run based on the level of output it expects to produce.-The long-run average total cost curve shows the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output.-(We assume the firm has chosen the cheapest plant size for each output level.)Returns to Scale-There are increasing returns to scale (economies of scale) when long-run average total cost declines as output increases.-There are decreasing returns to scale (is constant as output increases. diseconomies of scale) when long-run average total cost increases as output increases.-There are constant returns to scale when long-run average total cost remains constant as input