contrationary and expantionary
4PRODUCTION AND THE COSTS OF PRODUCTION
5080260350 Chapter in a Nutshell
00 Chapter in a Nutshell
In general, a firm’s production may take place in the short-run or the long-run period. The short run is a period in which the quantity of at least one input is fixed and we can vary the quantities of the other inputs. The long run is a time in which all inputs are considered to be variable in amount.
The relationship between physical output and the quantity of resources used in the production process is called a production function. A production function shows the maximum amount of output that we can produce with a given amount of resources.
According to the law of diminishing marginal returns, as a firm adds more of a variable input to a fixed input beyond some point the marginal productivity of the variable input diminishes.
A firm producing goods in the short run employs fixed inputs and variable inputs. Fixed costs are payments to fixed inputs, and they do not vary with output. Variable costs are payments to variable inputs, and they increase as output expands.
We can describe a firm’s costs in terms of a total approach: total fixed cost, total variable cost, and total cost. We can also describe them in terms of a per-unit approach: average fixed cost, average variable cost, and average total cost.
Marginal cost refers to the change in total cost when we produce another unit of output. The short-run marginal cost curve is generally U-shaped, reflecting the law of diminishing marginal returns. Also, the marginal cost curve intersects both the average total cost and average variable cost curves at their lowest points.
The long-run average total cost curve shows the minimum cost per unit of producing each output level when we can construct any desired size of a factory. Economies of scale and diseconomies of scale account for the U-shaped appearance of this cost curve.
In discussing the general shapes of a firm’s cost curves in the short run
5080260350 Chapter in a Nutshell
00 Chapter in a Nutshell
In general, a firm’s production may take place in the short-run or the long-run period. The short run is a period in which the quantity of at least one input is fixed and we can vary the quantities of the other inputs. The long run is a time in which all inputs are considered to be variable in amount.
The relationship between physical output and the quantity of resources used in the production process is called a production function. A production function shows the maximum amount of output that we can produce with a given amount of resources.
According to the law of diminishing marginal returns, as a firm adds more of a variable input to a fixed input beyond some point the marginal productivity of the variable input diminishes.
A firm producing goods in the short run employs fixed inputs and variable inputs. Fixed costs are payments to fixed inputs, and they do not vary with output. Variable costs are payments to variable inputs, and they increase as output expands.
We can describe a firm’s costs in terms of a total approach: total fixed cost, total variable cost, and total cost. We can also describe them in terms of a per-unit approach: average fixed cost, average variable cost, and average total cost.
Marginal cost refers to the change in total cost when we produce another unit of output. The short-run marginal cost curve is generally U-shaped, reflecting the law of diminishing marginal returns. Also, the marginal cost curve intersects both the average total cost and average variable cost curves at their lowest points.
The long-run average total cost curve shows the minimum cost per unit of producing each output level when we can construct any desired size of a factory. Economies of scale and diseconomies of scale account for the U-shaped appearance of this cost curve.
In discussing the general shapes of a firm’s cost curves in the short run