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GWU ECON 1011 - Chapter 11: Technology, production, and costs

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Chapter 11: Technology, production, and costsTechnology: 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 servicesTechnological change: a change in the ability of a firm to produce a given level of output with a given quantity of inputsShort run: the period of time during which at least one of a firm’s inputs is fixedLong 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 plantTotal 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 +VCOpportunity 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 yearProduction function: the relationship between the inputs employed by a firm and the maximum output it could produce with those inputsMarginal 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 hiredLaw 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 rateAverage 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 maximumMarginal cost: the change in a firm’s total cost from producing one more unit of a good or serviceM= 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 pointAverage total cost: total cost divided by the quantity of output producedATC= TC/QAverage fixed cost: fixed cost divided by the quantity of output producedAFC = FC/QAverage variable cost: variable cost divided by the quantity of output producedAVC=VC/Q**ATC= AFC + AVCCosts in the long run- All costs are variable- There are no fixed costsLong 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 fixedEconomies of scale: the situation when a firm’s long run average costs fall as it increases the quantity of output it producesConstant returns to scale: the situation in which a firm’s long run average costs remain unchanged as it increases outputMinimum efficient scale: the level of output at which all economies of scale are exhaustedDiseconomies of scale: the situation in which a firm’s long run average costs rise asthe firm increases


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