Technology, Production, and Costs
Technology, Production, and Costs ARE 1150
Popular in Principles of Agriculture & Resource Economics
Popular in Agricultural & Resource Econ
This 3 page Class Notes was uploaded by Caitrín Hall on Saturday April 30, 2016. The Class Notes belongs to ARE 1150 at University of Connecticut taught by Emma Bojinova in Spring 2016. Since its upload, it has received 22 views. For similar materials see Principles of Agriculture & Resource Economics in Agricultural & Resource Econ at University of Connecticut.
Reviews for Technology, Production, and Costs
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 04/30/16
Chapter 11 Technology, Production, and Costs 11.1 Technology: An Economic Definition The basic activity of a firm is to use inputs, such as workers, machines, and natural resources, to produce outputs of goods and services 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 11.2 The Shot 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; U shaped graph of cost vs. quantity of good per week Long run – the period of time in which a firm can vary all its inputs, adopt new technology, and increase or decreases the size of its physical plant The difference between Fixed Costs and Variable Costs Total cost – the cost of all inputs a firm uses in production Variable costs – costs that change as output changes Fixed costs – costs that remain constant as output changes; y- intercept of graph TC = FC + VC Economic depreciation – the difference between the amount paid for capital at the beginning of the year and the amount it could be sold for at the end of the year Explicit costs are sometimes called accounting costs Economic costs include accounting costs and implicit costs Production function – the relationship between the inputs employed by a firm and the maximum output it can produce with those inputs 11.3 The Marginal Product and Average Product of Labor Marginal product of labor – the additional output a firm produces as a result of hiring one more worker o An increase in the marginal product can result from the division of labor and from specialization o Law of diminishing marginal returns – the principle that, at some point, adding more of a variable input (labor) to the same amount of a fixed input (capital) will cause the marginal product of the variable input to decline o Marginal product of labor can be negative The Relationship between Marginal Product and Average Product Average product of labor – the total output produced by a firm divided by the quantity of workers o The average product of labor is the average of the marginal products of labor 11.4 The Relationship between Short-Run Production and Short-Run Cost Marginal cost – the change in a firm’s total cost from producing one more unit of a good or service Why Are the Marginal and Average Cost Curves U Shaped? Marginal cost of output and marginal product of labor are inversely related The marginal cost of production falls and then rises—forming a U shape —because the marginal product of labor rises and then falls 11.5 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 Q = level of output o ATC = (TC)/Q o AFC = (FC/Q) o AVC = (VC)/Q o Notice: ATC = AFC + AVC AFC is always declining because as production increases, the denominator grows ATC is the highest curve on graph because it is the sum of AFC and AVC MC curve intersects both ATC and AVC Key Facts: 1. When MC < AVC or ATC, it causes them to decrease. When MC is greater, it causes them to increase. When they are equal, they must be at their min points where MC curve intersects. All 3 curves are U shaped. 2. AFC gets smaller as output increases because the denominator grows larger while fixed costs remain constant; “spreading the overhead” *“overhead” refers to fixed costs* 3. The difference decreases between ATC and AVC because it is representing AFC, which gets small as output increases. 11.6 Costs in the Long Run Economies of Scale There are no fixed costs in the long run Long-run average cost curve – a curve that shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when not inputs are fixed Economies of scale – the situation when a firm’s long-run average costs fall as it increases the quantity of output as it produces o Constant returns to scale – the situation in which a firm’s long-run average costs remain unchanged as it increases output o Minimum efficient scale – the level of output at which all economies of scale are exhausted o Diseconomies of scale – the situation in which a firm’s long- run average costs rise as the firm increases output; applies only in long run when the firm is free to vary all its inputs, can adopt new technology, and can vary the amount of machinery it uses and the size of its facility o Diminishing returns applies only to the short run when at least one of the firm’s inputs is fixed Pi = TR – TC = PQ – ATC (Q) = Q (P – ATC) Table 11.4
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'