Chapter 11 Technology production and costs Technology the processes a firm uses to turn inputs into outputs of goods and services Basic activity of a firm is to use inputs to product outputs of goods and services Technological change a change in the ability of a firm to produce a given level of output with a given quantity of inputs Short run the period of time during which at least one of a firm s inputs is fixed Long run the period of time in which a firm can vary all its inputs adopt new technology and increase or decrease the size of its physical plant Total cost the cost of all the inputs a firm uses in production TC Variable costs the costs that change as output changes VC Fixed costs costs that remain constant as output changes FC TC FC VC Opportunity cost the highest valued alternative that must be given up to engage in an activity Explicit cost accounting costs a cost that involves spending money Implicit cost a nonmonetary opportunity cost Economic costs accounting costs and implicit costs Economic deprecation the difference between what one pays for their capital at the beginning of the year and what they could sell the capital for at the end of the year Production function the relationship between the inputs employed by a firm and the maximum output it could produce with those inputs Marginal product of labor the additional output a firm produces as a result of hiring one more work Determining how much total output increases as each additional worker is hired Law of diminishing returns the principle that at some point adding more of a variable input such as labor to the same amount of a fixed input such as capital will cause the marginal product of the variable input to decline When the point of diminishing return is reached production increases at a decreasing rate Average product of labor the total output produced by a firm divided by the quantity of workers The average product of labor is the average of the marginal products of labor Whenever the marginal product of labor is greater than the average product of labor the average product of labor must be increasing The marginal product of labor equals the average product of labor for the quantity of workers where the average product of labor is at its maximum Marginal cost the change in a firm s total cost from producing one more unit of a good or service M change TC change Q When the marginal product of labor is rising the marginal cost of output is falling When the marginal product of labor is falling the marginal cost of production is rising The marginal cost of production falls and the rises because the marginal product of labor rises then falls U shape Marginal cost average total cost when average total cost is at its lowest point Average total cost total cost divided by the quantity of output produced Average fixed cost fixed cost divided by the quantity of output produced Average variable cost variable cost divided by the quantity of output produced ATC TC Q AFC FC Q AVC VC Q ATC AFC AVC Costs in the long run All costs are variable There are no fixed costs Long run average cost curve a curve that shows the lowest cost at which a firm is able to produce a given quantity of output in the long run when no inputs are fixed Economies of scale the situation when a firm s long run average costs fall as it increases the quantity of output it produces Constant returns to scale the situation in which a firm s long run average costs remain unchanged as it increases output Minimum efficient scale the level of output at which all economies of scale are exhausted Diseconomies of scale the situation in which a firm s long run average costs rise as the firm increases output