ECON 101 Study Guide - Midterm Guide: Average Cost, Average Variable Cost, Diminishing Returns
Chapter 11 Reading Notes
Relationship between a firm’s inputs and its output: its production function- determines its cost
curves, the relationship between cost and quantity of output produced
Firm- an organization that produces goods or services for sale
It transforms inputs into output; quantity of output depends on quantity of inputs
Production Function: relation b/w the quantity firms use and output quantity produced
Fixed input: an input whose quantity is fixed for a period of time and cannot be varied
Variable Input: an input whose quantity the firm can vary at any time
Whether or not a quantity of an input is really fixed depends on the time horizon
Long run: the time period in which all inputs can be varied
Short run: the time period in which at least one input is fixed
Relationship b/w quantity of labor and quantity of output for a given amount of the fixed
input constitutes the firm’s production function ex. farm
Total product curve: shows how quantity of output depends on quantity of variable input for a
given quantity of fixed input
Total product curve gets flatter as employment
Marginal product of an input: additional quantity of output that is produced by using one more
unit of that input
Marginal Product of Input= change in quantity of output/ change in quantity of input
Diminishing returns to an Input: when an increase in the quantity of that input, holding the levels
of all other inputs fixed, leads to a decline in the marginal product of that input
Diminishing returns of an input indicates Marginal Product input curve= - slope
Each successive unit of an input will raise production by less than the last if quantity of all
others is held fixeddiminishing returns of an input
Fixed cost: cost that doesn’t depend on quantity of output produced; cost of fixed input
Fixed cost (FC) also known as overhead cost
Variable Cost: cost that depends on quantity of output produced; cost of variable input
Total cost: sum of fixed and variable cost of producing that quantity of output
Total Cost= FC+ VC
Total Cost curve: shows how total cost depends on the quantity of output
Total cost curve slopes upward since the total cost gets higher
Unlike total product curve, the total cost curve gets steeper rather than flatter
Marginal Cost: change in total cost generated by producing one more unit of output
MC is easiest to calculate if data on total cost are available in increments of one unit of
output; when the data comes in less easy increments, it’s still possible
Marginal cost= change in total cost/ change in quantity of output
Marginal cost is equal to the slope of the total cost curve
The marginal cost slopes upward because there are diminishing returns to inputs- as outputs
increase, the marginal product of the variable in put declines
This implies that more and more of variable input must be used to produce each additional
unit of output as the amount of output already produced rises
Since each unit of variable input has a cost, the additional cost per additional unit of output
also rises
Flattening of total product curve as output increases and the steepening of the total cost
curve as output increases are just flip-sides of the same phenomenon
That is as output increases, MC of output also increases because marginal product of
variable input decreases
Average total cost or avg. cost= total cost divided by quantity of output produced
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ECON 101 Full Course Notes
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Document Summary
Relationship between a firm"s inputs and its output: its production function- determines its cost curves, the relationship between cost and quantity of output produced. Firm- an organization that produces goods or services for sale. It transforms inputs into output; quantity of output depends on quantity of inputs. Production function: relation b/w the quantity firms use and output quantity produced. Fixed input: an input whose quantity is fixed for a period of time and cannot be varied. Variable input: an input whose quantity the firm can vary at any time. Whether or not a quantity of an input is really fixed depends on the time horizon. Long run: the time period in which all inputs can be varied. Short run: the time period in which at least one input is fixed. Relationship b/w quantity of labor and quantity of output for a given amount of the fixed input constitutes the firm"s production function ex. farm.
