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Chapter 20: Costs of Production / The Short-Run & The Long-Run. Principles of MicroEconomics: Econ102. The Short-Run / The Long-Run………. does not refer to a specific period of time, but rather are general or broad periods of time that coexist!! Short-Run:
Principles of MicroEconomics:
does not refer to a specific period of time, but rather are general or broad periods of time that coexist!!
The period of time during which at least one of the firm’s inputs is fixed.
A period of time long enough to allow a firm to vary all of its inputs, to adopt new technology, and to increase or decrease the size of its physical plant.
Total Accounting Costs =Explicit costs only
Total Economic Costs =Explicit + Implicit costs
Thosepaid to factors of production owned by people outside of the business (tangible, monetary costs)
Represent the opportunity costs of the owner(s), primarily intangible costs…..sacrifices….what is given up
Total revenue (TR) minus total economic costs (TEC)
Totalrevenue (TR) minus total accounting costs (TAC)
Total Revenue = Price multiplied by quantity/output (PxQ)
Costs that remain constant (don’t change) as output changes.
Costs that change as output changes.
Total cost: The cost of all the inputs a firm uses in production.
Total Cost = Fixed Cost + Variable Cost
TC = FC + VC
Average Fixed Costs (AFC):
Fixed costs divided by the quantity of output produced:
AFC = FC/Q
Average Variable Costs (AVC):
Variable costs divided by the quantity of output produced:
AVC = VC/Q
Average Total Costs (ATC):
Total costs divided by the quantity of output produced:
ATC = AFC+AVC or TC/Q
Marginal Physical Product……..
……..is the additional output a firm produces as a result of hiring one more worker.
and determined by how much total output increases as each additional worker is hired.
In the Short-Run, the Increase in Output Does not Occur at a Constant Rate…..
………because the Law of Diminishing Marginal Returns states 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 to decline.
The change or additional cost to a firm’s total cost from producing one more unit of a good or service.
……is the relationship between the inputs employed by the firm and the maximum output it can produce with those inputs
Graphing Cost Curves
Costs per Unit
Output/Quantity of Consultations Produced
Because: When the marginal product of labor (MPL) is rising, the marginal cost (MC) of output will be falling. When the marginal product of labor is falling, the marginal cost of production will be rising.
The marginal cost of production falls and then rises – a U-shape – because the marginal product of labor rises and then falls.
When marginal cost is below average total cost (ATC), average total cost will fall. When marginal cost is above ATC, average total cost will rise. Marginal cost will equal ATC when average total cost is at its lowest point.
Long-Run Average Total Cost:
The cost to produce each unit of a product given that the company can choose the size of plant that is best for that quantity.
Long-Run Average Total Cost Curve (LRAC):
A curve showing the lowest cost at which the firm is able to produce a given quantity of output in the long run, when no inputs are fixed.