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Micro: Chapter 12
Midterm 3
| Term | Definition |
|---|---|
| variable inputs | inputs that can be changed at any time; not hard for a firm to replace it; ex= labor |
| fixed inputs | input that cannot be changed without some time period; ex= space, building |
| long run vs short run | long run= all inputs can be changed; short run= at least 1 input is fixed; given enough time, you'll have an opportunity to change the fixed input (like expansion) |
| Why is the production curve upward sloping? | adding more workers = more stuff made |
| Why does the production curve flatten out? | adding more workers without expanding space means that each additional unit of labor will produce less than the individual before |
| marginal product of labor | change in quantity of output produced by adding one more worker; (change in quantity)/(change in labor); as you add more workers, you get less for it |
| diminishing returns | as you add more workers, you get less for it bc they all are competing with a fixed input; add more workers, but not changing anything else; you need both inputs to produce. add 1 input but not other, input of A will reduce ability of B to produce outputs |
| Why does adding new stores = new curve? | in everything else is held constant within the curve, must create new curve to represent a change in something besides the input of interest; |
| fixed cost (FC) | a cost that does not change with quantity in the short run; overhead costs; ex= monthly rent, its independent of cups sold; independent of the number of people you add |
| variable cost (VC) | costs that do change with/depnds on output level; ex= wage and number of workers; tends to go up as you add more people |
| total cost (TC) | TC=FC+VC |
| Why does the cost curve upwards? | shoving variable input (ie one that can be changed) into a fixed atmosphere (ie one that can't be changed); can't produce as much; each unit of production is getting constantly more expensive on the margin |
| marginal cost (MC) | (change in TC)/(change in quantity); it is generally increasing -> based on idea of decreasing marginal product, added benefit of producing one more unit is decreasing |
| average cost (AC) | (total cost)/(quantity); as you produce more, AC decreases; VC increases, but FC aren't, so at least at beginning, AC goes down; increased production brings AC down because you can spread costs across a lot of products |
| average variable cost (AVC) and average fixed cost (AFC) | AVC=VC/Q and AFC=FC/Q; AFC goes down as you add more units bc you're spending a fixed cost over an increasing about of units; AVC goes up as you add more units (can't produce as much as you increase workers but not space) |
| What happens to ATC? | it will eventually start to increase; this happens when the ATC line intersects with the MC |
| Why does the AVC increase in quantity? | diminishing returns effect; keep producing more, get less stuff out of each of them; each unit costs more, which pulls the average up |
| Why does the AFC decrease in quantity? | spreading effect; spreading fixed cost over more and more units |
| Why is the ATC a u-shaped curve? | ATC=AVC+AFC; two effects fight against each other; decreasing effects of AFC are large for small quantities, get smaller; diminishing returns are small for small quantities, get larger; AFC slopes down, gets less steep, AVC slopes up, gets steeper |
| minimum cost output and MC | at min cost output MC=ATC; for Q < min cost output, MC<ATC; for Q > min cost output, MC>ATC |
| more realistic MC curves | isn't always increasing; early on, expansion and specialization can help, so period of increasing marginal returns; but it's a swoosh; leads to u-shaped AVC and MC intersects AVC at lowest point, too |
| long run ATC curve (LRATC) | longer, flatter than short run ATC (SRATC); every short run ATC is on or above the LRATC; curve that maximizes ATC for any given Q when all inputs are adjustable; u-shaped |
| difference between SRATC and LRATC | SRATC= quantity and cost choices for a given fixed cost; LRATC= firms can pick the SR curve on which they exist -> pick a quantity, tells you the cheapest way to do something (open new store, cut/add workers?) |
| increasing returns to scale (economics of scale) | being bigger makes average cost of production (ATC) go down; why? specialization, spreading fixed costs, network externalities |
| decreasing returns to scale (diseconomies of scale) | being bigger company is more expensive than being a smaller company; more buildings = more cost; why? the larger the firm, the harder it is to manage operations, coordinate problems, etc |
| constant returns to scale | getting bigger doesn't make it cheaper/more expensive |
| difference between SRATC and LRATC in words | SRATC= what's the best Q given my costs; given my world, what's the cheapest thing I can do?; LRATC= what's the best cost curve given my ideal Q?; given where I want to be, which world should I pick that's the cheapest combo given what I want |
Created by:
nicook
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