Transcript The Economic Problem

Production in the Short Run
1. In the short run
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some inputs are fixed (e.g. capital)
other inputs are variable (e.g. labour)
2. Inputs are combined to make a
business’s total product
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average product is total product divided by
the number of workers
marginal product is the extra total product
from employing an additional worker
Relating Average and Marginal
Values
3. Average and marginal values are
related using three rules
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if an average value rises then the marginal
value must be above the average value
if an average value falls then the marginal
value must be below the average value
if an average value stays constant then the
marginal value must equal the average value
Total, Marginal, and Average Product
In this example, the total product curve is
hill-shaped, with its peak at 5 workers and
its slope dependent on the behaviour of
marginal product.
The range of increasing returns, where
marginal product rises, applies during the
hiring of the first 2 workers.
In the range of positive diminishing
returns, during the hiring of the third,
fourth, and fifth workers, marginal product
falls and is positive.
In the last range of negative diminishing
returns, from the sixth worker onward,
marginal product falls and is negative. The
shape of the average product curve can be
linked to marginal product, since average
product reaches a maximum where it
crosses the marginal product curve at 2
workers.
Costs in the Short Run
4. Short-run costs include
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fixed costs (costs of all fixed inputs)
variable costs (costs of all variable inputs)
total cost (fixed costs + variable costs)
Marginal Cost
5. Marginal cost is the extra cost of
producing an extra unit of output
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it equals the change in total cost divided
by the change in total product
Per-Unit Costs
6. Per-unit costs include
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average fixed cost (fixed costs divided by
total product)
average variable cost (variable costs divided
by total product)
average cost
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either total cost divided by total product
or average fixed cost + average variable
cost
Summary of Short-Run Cost Curves
When a business’s output of a
certain product rises, the average
fixed cost curve (AFC) falls. The
average variable cost curve (AVC)
declines until it reaches point “a”,
where it meets the marginal cost
curve (MC), after which the AVC
curve rises. The average cost
curve (AC) also falls, and then rises.
It reaches a minimum at point “b”
where it meets the MC curve.