Econ 1 - Week 4 Notes
Econ 1 - Week 4 Notes Econ 1
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This 3 page Class Notes was uploaded by Elena Stacy on Friday July 22, 2016. The Class Notes belongs to Econ 1 at University of California Berkeley taught by Monica Deza in Summer 2016. Since its upload, it has received 11 views. For similar materials see Introduction to Economics in Economcs at University of California Berkeley.
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Date Created: 07/22/16
Week 4 Production Function - Production function: the relationship that states that the quantity of output produced depends on the quantity of inputs o In mathematical terms: Q = f (K, L) • Q represents level of output • K represents capital input • L represents labor input - Inputs: o Fixed inputs: fixed for a period of time, cannot be changed in the “short run” o Variable inputs: the firm can vary this input anytime “Long run” = however long it takes for all of your inputs to become “variable” - Total product curve: graphical representation of the relationship between quantity of output and quantity of variable input (at a given quantity of a fixed input) Total product curve example(left) Marginal product of labor curve (right) Shifts - Both curves can be shifted if input levels are changed o Example: if a farm has an increase in land available, the TP curve and MPL curve will shift upward (much like a shift in PPF) because at each quantity of workers, each worker will produce more output Marginal product of Labor - The “marginal product” of any input is the additional quantity of output produced by using one more unit of input MPL (Marginal product of labor) = Change in quantity of output / change in quantity of labor Diminishing marginal product of labor: - The first worker is more productive than the last worker o Eventually, hiring another worker returns less increase in output than the first additions of workers, and is thus less beneficial - Seen in the above TP curve (total product curve) as the slope eventually becomes negative as adding more workers eventually leads to less input - Seen in the MPL curve with a constant downward slope similar to the demand curve *Diminishing MPL is a strictly short run concept* Cost curves TC = FC + VC Total Cost = Fixed Cost + Variable Cost Fixed Cost (FC): the cost incurred even when Quantity produced/sold is zero (not dependent on quantity of output produced) Variable cost (VC): cost incurred from variable inputs (dependent on the quantity of output produced) *Industries with large fixed costs are massive producers (in order to offset the burden of these fixed costs) * Total cost curve: relationship between total cost and quantity of output - Upward sloping o Diminishing returns result in a higher cost as quantity of output increases, which causes the upward slope - Marginal cost (review): added cost of an additional unit o MC = change in total cost / change in quantity of output Recall: Marginal cost curve is also upward sloping Average Total Cost - ATC is generally represented by a U shaped curve o First falls in the lower levels of output and then increases as outputs increase, due to increasing costs o The Marginal Cost (MC) curve intersects the ATC curve at the minimum point of the “U” o Spreading Effect on ATC Larger outputs result in a wide spread of costs, lowering AFC (resulting in a lower ATC) o Diminishing Effect on ATC Larger outputs require more variable inputs, raising AVC (resulting in a higher ATC) - These effects are opposite results of the same thing (larger outputs), so the ultimate resulting change in ATC depends on which effect is more powerful at each additional output o At lower levels of output, spreading effect generally dominates, which is why ATC is usually initially downward sloping o At higher levels of output, diminishing effect dominates, which is why ATC begins to slope upward (The minimum of the U is the point at which neither effect dominates) Computation of Average Total Cost: ATC (average total cost) = TC (total cost)/Q (quantity) = (FC+VC) (fixed costs + variable costs)/Q (quantity) = (FC/Q) (fixed costs / quantity) + (VC/Q) (variable costs / quantity) = AFC (average fixed cost) + AVC (average variable cost) *Note* typical Marginal Cost curves slope downward briefly, and eventually slope upward - initial increasing returns, but eventual diminishing returns
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