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The time period during which at least one input, such as plant size, cannot be changed.
The physical size of the factories that a firm owns and operates to produce its output.Plant size can be defined by square footage,maximum physical capacity, and other physical measures.
The time period during which all factors of production can be varied.
We consider the plant and heavy equipment, the size or amount of which cannot be varied in the short run, as fixed resources. land may be a fixed resource.
"variable inputs" or "Variable factors of production"
Typically, the variable inputs of a firm are its labor and its purchases of raw materials.
In the short run, in response to changes in demand, the firm can, by definition,change only the amounts of its variable inputs.
is any process by which resources are transformed into goods or services. Production includes not only making things but also transporting them, retailing, repackaging them, and so on.
Production function The relationship between inputs and maximum physical output. A production function is a technological, not an economic, relationship.
Average physical product
Total product divided by the variable input
Marginal physical product
The physical output that is due to the addition of one more unit of a variable factor of production. The change in total product occurring when a variable input is increased and all other inputs are held constant. It is also called marginal product.
Diminishing Marginal Product
When Marginal physical product starts to diminish from adding one more Variable Factor of Production (labor). Thus, Physical Capital (Land, Machinery) must be held constant.
Law of diminishing marginal product
The observation that after some point,successive equal-sized increases in a variable factor of production, such as labor,added to fixed factors of production will result in smaller increases in output.
(Crowding Out Effect)
Point of saturation
marginal physical product becomes negative when adding one more variable input.
(Company Loses Money)
Example: from 2 to -1
The sum of total fixed costs and total variable costs.
Total costs (TC) = total fixed costs + (TFC) total variable costs (TVC)
TC = TFC + TVC
Costs that do not vary with output. Fixed costs typically include such expenses as rent on a building. These costs are fixed for a certain period of time (in the long run, though, they are variable).
Costs that vary with the rate of production.They include wages paid to workers, number of workers hired, and purchases of materials.
Average total costs (ATC)
ATC = AFC + AVC
Average variable costs (AVC)
Average fixed costs (AFC)
Total costs due to a one-unit change in production rate.
The long run, during which all inputs are variable.
in the long run, all factors of production are variable and the long run is sometimes called the planning horizon.
Long-run curves are sometimes called planning curves
Long-run average cost curve
The locus of points representing the minimum unit cost of producing any given rate of output,given current technology and resource prices.
Economies of scale
Decreases in long-run average costs resulting from increases in output.
Constant returns to scale
No change in long-run average costs when output increases. Diseconomies of scale
Diseconomies of scale
Increases in long-run average costs that occur as output increases.
Reasons for Economies of Scale
- 1. specialization
- 2. the dimensional factor
- 3. improvements in productive equipment
Sometimes called increased division of tasks or operations. Cost reductions generated by productivity enhancements from such division of labor or increased specialization
the dimensional factor
certain inputs do not have to be physically doubled inorder to double the output
improvements in productive equipment
The larger the scale of the enterprise,the more the firm is able to take advantage of larger-volume (output capacity)types of machinery.
Why a Firm Might Experience Diseconomies of Scale
As the layers of supervision grow, the costs of information and communication grow more than proportionately. Hence, the average unit cost will start to increase.
Minimum efficient scale (MES)
The lowest rate of output per unit time at which long-run average costs for a particular firm are at a minimum.
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