Costs and production
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fixed costs – costs that do not vary with the level of output. Fixed costs are the same at all levels of output (even when output equals zero).
variable costs – costs that vary with the level of output (= 0 when output is zero)
VCFCTC
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Average fixed cost (AFC) = TFC / Q
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Average variable cost (AVC) = TVC / Q
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Average total cost (ATC) = TC / Q ATC = AFC + AVC (since TFC + TVC = TC)
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Marginal cost (MC) = cost of an additional unit of output
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Note that the MC curve intersects the AVC and ATC at their respective minimum points
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In the long run, a firm may choose its level of capital, and will select a size of firm that provides the lowest level of ATC.
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Economies of scale – factors that lower average cost as the size of the firm rises in the long run◦ Sources: specialization and division of labor,
indivisibilities of capital, etc. Diseconomies of scale – factors that raise
average cost as the size of the firm rises in the long run◦ Sources: increased cost of managing and
coordination as firm size rises Constant returns to scale – average costs
do not change as firm size changes
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Minimum efficient scale = lowest level of output at which LRATC is minimized
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The total amount of output produced by a The total amount of output produced by a firm is a function of the levels of input firm is a function of the levels of input usage by the firmusage by the firm
Total Physical Product (TPP) function - a Total Physical Product (TPP) function - a short-run relationship between the amount short-run relationship between the amount of of labourlabour and the level of output, and the level of output, ceteris ceteris paribusparibus..
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as the level of a variable input rises in a production process in which other inputs are fixed, output ultimately increases by progressively smaller increments.
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APP = TPP / amount of inputQuantityof labor TPP APP
0
5
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0
50
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270
-10
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12
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9
7.86
6.88
6
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the additional output that results from the use of an additional unit of a variable input, holding other inputs constant
measured as the ratio of the change in output (TPP) to the change in the quantity of labor (or other input) used
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Note that the MPP is positive when an increase in labor results in an increase in output; a negative MPP occurs when output falls when additional labor is used.
Quantityof labor TPP APP
0
5
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MPP0
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-10
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7.86
6.88
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14
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8
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1
0
-1
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APP rises when MPP > APP
APP falls when MPP < APP
APP is maximized when MPP = APP
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http://www.oswego.edu/~kane/eco101.htm Czarny B. „Podstawy ekonomii”, PWE, 2002