ECO101H1 Lecture Notes - Lecture 7: Marginal Cost, Marginal Product, Diminishing Returns
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ECO101H1 Full Course Notes
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To answer, must first understand firms" cost schedules. Relates output to quantity of inputs (capital, labour) One input (capital) is fixed, while one input (labour) can vary. Gm can vary amount of labour (overtime, lay-offs) Gm can vary number of plants and amount of labour. Law of diminishing returns: the marginal product of a variable input, in the presence of a fixed input, eventually diminishes. Marginal product declines variable input: labour (chefs) fixed input: capital (kitchen/ovens) Total fixed cost (tfc): total cost of fixed input. Increase in total cost / increase in output. Mc = tc/ output (also known as marginal product or mp) *fixed costs do not change, variable costs do change. Observations: law of diminishing returns (short run) mp eventually , mp mc , mp mc . The marginal product of labour is at its maximum, mc is at its minimum. Mc interests atc at minimum of atc because.