Average Fixed Cost

(AFC)

is total fixed cost per unit of output.

Average Variable Cost

(AVC)

is total variable cost per unit of output.

Average Total Cost

(ATC)

is total cost per unit of output.

Total product

Total product is the maximum output
that a given quantity of labour can produce.

marginal product

The marginal product of labour is the increase in
total product that results from a one-unit increase in
the quantity of labour employed, with all other inputs
remaining the same.

average product

tells how productive workers are on average.

long run

a time frame in which the quantities of
all factors of production can be varied.

short run

is a time frame in which the quantity
of at least one factor of production is fixed.

total product curve

[image]

The total product curve is similar to the production
possibilities frontier.
It separates the attainable output levels from those
that are unattainable. All the points that lie above
the curve are unattainable. Points that lie below the
curve, in the orange area, are attainable, but they are
inefficient—they use more labour than is necessary to
produce a given output. Only the points on the total
product curve are technologically efficient.

diminishing marginal returns

occur when the marginal product of an additional
worker is less than the marginal product of the
previous worker.

laws of diminishing returns

states that:

As a fi rm uses more of a variable factor of
production with a given quantity of the fi xed
factor of production, the marginal product of
the variable factor eventually diminishes.

marginal cost curve

( MC )

intersects the average variable cost curve and the average total cost curve at their minimum points .

Decision Tim Frames

■ In the short run, the quantity of at least one factor
of production is fixed and the quantities of the other factors of production can be varied.

■ In the long run, the quantities of all factors of
production can be varied.

Short-Run Technology Constraint

■ A total product curve shows the quantity a firm
can produce with a given quantity of capital and
different quantities of labour.
■ Initially, the marginal product of labour increases
as the quantity of labour increases, because of
increased specialization and the division of labour.
■ Eventually, marginal product diminishes because
an increasing quantity of labour must share a fixed
quantity of capital—the law of diminishing returns.
■ Initially, average product increases as the quantity
of labour increases, but eventually average product
diminishes.

Short-Run Cost

■ As output increases, total fixed cost is constant,
and total variable cost and total cost increase.

■ As output increases, average fixed cost decreases
and average variable cost, average total cost,
and marginal cost decrease at low outputs and
increase at high outputs. These cost curves are
U-shaped.

Long Run Cost

■ A firm has a set of short-run cost curves for each
different plant. For each output, the firm has
one least-cost plant. The larger the output, the
larger is the plant that will minimize average
total cost.

■ The long-run average cost curve traces out the
lowest attainable average total cost at each output
when both capital and labour inputs can be
varied.

■ With economies of scale, the long-run average
cost curve slopes downward. With diseconomies
of scale, the long-run average cost-curve slopes upward.

see p. 260-263