ECON 201 Chapter 5 Notes - Supply Decisions
ECON 201 Chapter 5 Notes - Supply Decisions ECON 201
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This 3 page Class Notes was uploaded by Marlinda Chism on Thursday February 4, 2016. The Class Notes belongs to ECON 201 at University of Tennessee - Knoxville taught by K. Sims in Spring 2016. Since its upload, it has received 116 views. For similar materials see Macroeconomics in Economcs at University of Tennessee - Knoxville.
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Date Created: 02/04/16
Chapter 5 Notes Objectives Explain what the production function reveals. Explain why the law of diminishing returns applies. Describe the nature of fixed, variable and marginal costs. Illustrate the difference between production and investment decisions. Discuss how accounting costs and economics costs differ. Vocabulary Supply – The ability and willingness to sell (produce) specific quantities of a good at alternative prices in a given time period, ceteris paribus. Factors of production – Resource inputs used to produce goods and services (land, labor, capital, and entrepreneurship) Production function – A technological relationship expressing the maximum quantity of a good attainable from different combinations of factor inputs. Marginal physical product (MPP) – The change in total output associated with one additional unit of input. (MPP equals zero if the additional worker doesn’t change the total output in production) change∈totaloutput Marginal physical product (MPP) = change∈inputquantity Law of diminishing returns – The marginal physical product of a variable input declines as more of it Is employed with a given quantity of other (fixed) inputs. Short run - The period in which the quantity (and quality) of some inputs cannot be changed. Long run – A period of time long enough for all inputs to be varied (no fixed costs). Profit – The difference between total revenue and total cost. Profit = total revenue – total cost Total cost – The market value of all resources used to produce a good or service. Fixed costs – Costs of production that do not change when the rate of output is altered, such as the cost of basic plant and equipment. Variable costs – Costs of production that change when the rate of output is altered, such as labor and material costs. (Variable costs increase as total output increases.) Average total costs (ATC) – Total cost divided by the quantity produced in a given time period. totalcost Average total costs (ATC) = totaloutput Average total costs (ATC) = Average fixed cost + Average variable cost Marginal costs (MC) – The increase in total cost associated with a one-unit increase in production. change∈totalcost Marginal costs (MC) = change∈totaloutput Investment decision – The decision to build, buy, or lease plant and equipment; to enter or exit an industry. Economic cost – The value of all resources used to produce a good or service; opportunity cost. Economic costs = explicit costs + implicit costs Key Concepts Businesses choose how much of their economic capacity they want to use. The relative scarcity of other inputs (capital and land) constrains the marginal physical product of labor. As more labor is hired, each unit of labor has less land and capital to work with. The limited availability of space or equipment is the cause of diminishing returns. A firm’s goal is to maximize profits, not production. The rate at which total costs rise depends completely on variable costs. ATC curve: Average costs start high, fall, then rise once again, giving the ATC curve a distinctive U shape. Marginal cost is a basic determinant of short-run supply (production) decisions. There are no fixed costs in the long run. The difference between short and long run supply decisions is based on whether commitments have been made (not a time frame). The essential economic question is how many resources are used in production. Economists keep track of ALL costs (implicit and explcit). The economic costs of production include the value of ALL resources used. Accounting costs usually include only those dollar costs actually paid (explicit costs).
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