11-Outputs and Costs

-all firms in all markets make a decision about quantity to produce and price to charge -goal: attain maximum profit Short Run: -time frame of at least one factor of production is fixed -plant: fixed factor of production (generally capital, land, entrepreneurship) -production and labour variable factors of production -easily reversed (generally by changing amount of labour it hires) Long Run: -quantities of all factors of production can be varied -not easily reversed -sunk cost: past expenditure on a plant that has no resale value, irrelevant to current decisions Short Run Technology Constraint: -describe relationship between output and quantity of labour employed using three concepts: total product, marginal product, average product -can be explained using product schedule or product curve -total product: maximum output that a given quantity of labour can produce -marginal product: increase in total product that results from one-unit increase in quantity of labour employed (increases then decreases), marginal product of 3rd worker is increase from 2 to 3 -average product: how productive workers are in general (increases then decreases) Product Schedule: -shows how quantity of sweaters produced increases as Campus Sweaters employs more workers (productivity of labour) Product Curves Total Product Curve: -graph of total product schedule -first increasing (becomes steeper), then becomes less steep -points above curve are unattainable, below curve are attainable but inefficient -points on curve are technologically efficient Marginal Product Curve: -slope of total product curve -each company’s curves are different, but have similar shape -increasing marginal returns (marginal product of additional worker exceeds marginal product of previous worker) initially from increased specialization, division of labour -diminishing marginal returns eventually from the fact that more and more workers are using same capital, working in same space Law of Diminishing Returns: -as firm uses more of a variable factor of production with a given quantity of fixed factor of production, marginal product of variable factor eventually diminishes Average Product Curve: -largest when average product and marginal product are equal -average product increasing when marginal product exceeds average product -average product decreasing when marginal product is less than average product ................................CONTINUED..................................