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Technology: An Economic Definition

Learning Objective 10.1. Technology: An Economic Definition. Technology The processes a firm uses to turn inputs into 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.

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Technology: An Economic Definition

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  1. Learning Objective 10.1 Technology: An Economic Definition Technology The processes a firm uses to turn inputs into 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.

  2. Learning Objective 10.2 The Short Run and the Long Run in Economics 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.

  3. Learning Objective 10.2 The Short Run and the Long Run in Economics The Difference between Fixed Costs and Variable Costs Total cost The cost of all the inputs a firm uses in production. Variable costs Costs that change as output changes. Fixed costs Costs that remain constant as output changes. Total Cost = Fixed Cost + Variable Cost TC = FC + VC

  4. Learning Objective 10.2 MakingtheConnection • Fixed Costs in the Publishing Industry Publishers consider the salaries of editors to be a fixed cost.

  5. Learning Objective 10.2 The Short Run and the Long Run in Economics Implicit Costs versus Explicit Costs Opportunity cost The highest-valued alternative that must be given up to engage in an activity. Explicit cost A cost that involves spending money. Implicit cost A nonmonetary opportunity cost.

  6. Learning Objective 10.2 The Short Run and the Long Run in Economics Implicit Costs versus Explicit Costs Table 10-1 Jill Johnson’s Costs per Year

  7. Learning Objective 10.2 The Short Run and the Long Run in Economics The Production Function Table 10-2 Short-Run Production and Cost at Jill Johnson’s Restaurant

  8. Learning Objective 10.2 The Short Run and the Long Run in Economics The Production Function Production function The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs. A First Look at the Relationship between Production and Cost Average total cost Total cost divided by the quantity of output produced.

  9. Learning Objective 10.2 The Short Run and the Long Run in Economics A First Look at the Relationship between Production and Cost FIGURE 10-1 Graphing Total Cost and Average Total Cost at Jill Johnson’s Restaurant

  10. Learning Objective 10.3 The Marginal Product of Labor and theAverage Product of Labor Marginal product of labor The additional output a firm produces as a result of hiring one more worker. Table 10-3 The Marginal Product of Labor at Jill Johnson’s Restaurant

  11. Learning Objective 10.3 The Marginal Product of Labor and the Average Product of Labor The Law of Diminishing Returns 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.

  12. Learning Objective 10.3 The Marginal Product of Labor and the Average Product of Labor Graphing Production FIGURE 10-2 Total Output and theMarginal Product of Labor

  13. Learning Objective 10.3 The Marginal Product of Labor and the Average Product of Labor The Relationship between Marginal and Average Product Average product of labor The total output produced by a firm divided by the quantity of workers.

  14. Learning Objective 10.3 The Marginal Product of Labor and the Average Product of Labor An Example of Marginal and Average Values: College Grades FIGURE 10-3 Marginal and Average GPAs

  15. Learning Objective 10.4 The Relationship between Short-RunProduction and Short-Run Cost Marginal Cost Marginal cost The change in a firm’s total cost from producing one more unit of a good or service.

  16. Learning Objective 10.4 The Relationship between Short-RunProduction and Short-Run Cost Why Are the Marginal and Average Cost Curves U Shaped? FIGURE 10-4 Jill Johnson’s Marginal Cost and Average Total Cost of Producing Pizzas

  17. Learning Objective 10.4 10-4 Solved Problem The Relationship between Marginal Cost and Average Cost

  18. Learning Objective 10.5 Average total cost = ATC = Average fixed cost = AFC = Average variable cost = AVC = Graphing Cost Curves 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 = AFC + AVC

  19. Learning Objective 10.5 Graphing Cost Curves FIGURE 10-5 Costs at Jill Johnson’s Restaurant

  20. Learning Objective 10.5 Graphing Cost Curves Understand the following three key facts about Figure 10-5: 1 The marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves are all U shaped, and the marginal cost curve intersects the average variable cost and average total cost curves at their minimum points. When marginal cost is less than either average variable cost or average total cost, it causes them to decrease. When marginal cost is above average variable cost or average total cost, it causes them to increase. Therefore, when marginal cost equals average variable cost or average total cost, they must be at their minimum points. 2 As output increases, average fixed cost gets smaller and smaller. This happens because in calculating average fixed cost, we are dividing something that gets larger and larger—output—into something that remains constant—fixed cost. Firms often refer to this process of lowering average fixed cost by selling more output as “spreading the overhead.” By “overhead” they mean fixed costs. 3As output increases, the difference between average total cost and average variable cost decreases. This happens because the difference between average total cost and average variable cost is average fixed cost, which gets smaller as output increases.

  21. Learning Objective 10.6 Costs in the Long Run Economies of Scale Long-run average cost curve A curve showing 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 output.

  22. Learning Objective 10.6 Costs in the Long Run Economies of Scale FIGURE 10-6 The Relationship between Short-Run Average Cost and Long-Run Average Cost

  23. Learning Objective 10.6 Costs in the Long Run Long-Run Average Total Cost Curves for Bookstores Constant returns to scale The situation when 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 when a firm’s long-run average costs rise as the firm increases output.

  24. Learning Objective 10.6 10-6 Solved Problem Using Long-Run Average Cost Curves to Understand Business Strategy

  25. Learning Objective 10.6 Costs in the Long Run Don’t Let This Happen to YOU!DON’T CONFUSE DIMINISHING RETURNS WITH DISECONOMIES OF SCALE

  26. Conclusion Table 10-4 A Summary of Definitions of Cost

  27. Lower Manufacturing Costs Push Down the Price of Flat-Panel TVs LOOK An Inside Flat-Panel TVs, Long Touted, Finally Are Becoming the Norm

  28. Appendix An Isoquant Graph • Isoquants Isoquant A curve that shows all the combinations of two inputs, such as capital and labor, that will produce the same level of output. FIGURE 10A-1 Isoquants

  29. Appendix The Slope of an Isoquant • Isoquants Marginal rate of technical substitution (MRTS) The slope of an isoquant, or the rate at which a firm is able to substitute one input for another while keeping the level of output constant.

  30. Appendix Isocost line All the combinations of two inputs, such as capital and labor, that have the same total cost. • Isocost Lines Graphing the Isocost Line FIGURE 10A-2 An Isocost Line

  31. Appendix The Slope and Position of the Isocost Line • Isocost Lines FIGURE 10A-3 The Position of the Isocost Line

  32. Appendix • Choosing the Cost-Minimizing Combination of Capital and Labor FIGURE 10A-4 Choosing Capital and Labor to Minimize Total Cost

  33. Appendix • Choosing the Cost-Minimizing Combination of Capital and Labor Different Input Price Ratios Lead to Different Input Choices FIGURE 10A-5 Changing Input Prices Affects the Cost-Minimizing Input Choice

  34. MakingtheConnection • The Changing Input Mix in Walt Disney Film Animation

  35. Appendix • Choosing the Cost-Minimizing Combination of Capital and Labor Another Look at Cost Minimization

  36. 10A-1 Solved Problem Determining the Optimal Combination of Inputs

  37. Appendix Expansion path A curve that shows a firm’s cost-minimizing combination of inputs for every level of output. • The Expansion Path FIGURE 10A-6 The Expansion Path

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