to do today: short-run production (only labor...
TRANSCRIPT
![Page 1: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/1.jpg)
To do today: short-run production (only labor variable)
To increase output with a fixed plant, a firm must increase the quantity of labor it uses.
![Page 2: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/2.jpg)
Short-run production: only labor variable
To increase output with a fixed plant, a firm must increase the quantity of labor it uses.
How much will it use?
Requires
• Total product (TP)
• Marginal product (MP)
• Average product (AP)
![Page 3: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/3.jpg)
Consequences of the short run
! Add more labor to increase output
! But can’t add more capital goods
![Page 4: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/4.jpg)
Note similarity to total utility!
Points A through H on the curve correspond to the columns of the table.
The TP curve separates attainable points and unattainable points.
Graphing total product
![Page 5: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/5.jpg)
Marginal product: note role of labor!
Marginal product (MP) : change in total product from a one-unit increase in the quantity of labor employed (Ql).
When the quantity of labor increases by more (or less) than one worker, calculate marginal product as
MP Change in TP Change in Ql = ÷
![Page 6: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/6.jpg)
Increasing marginal returns initially
Decreasing marginal returns eventually
Negative marginal returns where TP
Short-run Production: the pattern
!
![Page 7: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/7.jpg)
Marginal returns: first increasing then decreasing
Increasing marginal returns: from increased specialization and division of labor in the production process.
Decreasing marginal returns: more and more workers use the same equipment and work space.
‘Law” of decreasing marginal returns.
![Page 8: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/8.jpg)
Average product
Like any average – total divided by the number of units
AP = TP ÷ Ql
Another name for average product is productivity.
![Page 9: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/9.jpg)
![Page 10: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/10.jpg)
Short run cost
Costs change with output depending on the shape of three relationships
• Total cost • Marginal cost • Average cost
![Page 11: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/11.jpg)
Fixed and variable costs
Fixed examples: factory building (rent or the mortgage payment), machines (rent or the interest on loan used to buy machines)
Variable examples: workers (wages), electricity to run the machines, office supplies like paper, raw materials like dough and sauce for pizza.
![Page 12: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/12.jpg)
Total cost is the sum of total fixed cost and total variable cost. That is,
TC = TFC + TVC
Remember for what comes next: Fixed does not change with the level of output.
Short run total cost
![Page 13: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/13.jpg)
.
TFC is constant—it graphs as a horizontal line.
TC then also increases as output increases.
TVC increases as output increases.
Graphing short run costs
![Page 14: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/14.jpg)
The vertical distance between the TC curve and the TVC curve is TFC cost
TFC in two places
![Page 15: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/15.jpg)
Marginal cost (MC)
MC: change in total cost that results from a one-unit increase in TP.
She produces one more widget: MC is the cost of this additional unit of output.
.
![Page 16: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/16.jpg)
Average cost: three concepts (from TC)
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.
![Page 17: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/17.jpg)
Total and average cost conceps
The average cost concepts are calculated from the total cost concepts as follows:
TC = TFC + TVC
Divide each total cost term by the quantity produced, Q, to give
ATC = AFC + AVC
Q Q Q TC = TFC + TVC
or,
![Page 18: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/18.jpg)
Average fixed cost (AFC) decreases as output increases.
The average variable cost curve (AVC) is U-shaped.
The average total cost curve (ATC) is also U-shaped.
Graphing cost curves
![Page 19: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/19.jpg)
![Page 20: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/20.jpg)
The marginal cost curve (MC) is U-shaped and intersects the average variable cost curve and the average total cost curve at their minimum points.
The vertical distance between ATC and AVC curves is equal to AFC, as illustrated by the two arrows.
Relationships among cost curves
![Page 21: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/21.jpg)
Explaining the shape of the ATC
The shape of the ATC curve combines the shapes of the AFC and AVC curves.
The U shape of the average total cost curve arises from the influence of two opposing forces:
• Spreading total fixed cost over a larger output • Decreasing marginal returns
![Page 22: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/22.jpg)
Short run cost and product curves
As productivity decreases, costs rise.
This means that cost and product curves are reverse sides of the coin.
![Page 23: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/23.jpg)
MC curve is linked to its MP curve.
If MP rises, MC falls.
If MP is a maximum, MC is a minimum.
The cost and product curve relationship graphically
![Page 24: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/24.jpg)
![Page 25: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/25.jpg)
AVC linked to AP (average product).
If AP rises, average variable cost falls.
If average product is a maximum, average variable cost is a minimum.
Cost and product curves
![Page 26: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/26.jpg)
At small outputs, MP and AP " MC and AVC ! At intermediate outputs, MP ! MC " AP" AVC !
At large outputs, MP and AP ! MC and AVC "
Cost and product curves
![Page 27: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/27.jpg)
Shifts in cost curves: what technology does
A technological change that increases productivity shifts the TP curve upward.
It also shifts the MP curve and the AP curve upward.
Why? An advance in technology lowers the AC and MC and so shifts the short-run cost curves downward.
![Page 28: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/28.jpg)
Shifts: prices of factors of production
How the curves shift depends on which resource price changes.
An increase in rent or another component of FC • Shifts the fixed cost curves (TFC and AFC) upward. • Shifts the total cost curve (TC) upward. • Leaves the variable cost curves (AVC and TVC) and
the marginal cost curve (MC) unchanged.
![Page 29: To do today: short-run production (only labor variable)courses.umass.edu/econ103a/s12_103a_l13p.pdf · ATC = AFC + AVC Q Q Q TC = TFC + TVC or, Average fixed cost (AFC) decreases](https://reader033.vdocuments.mx/reader033/viewer/2022060607/605d77aaf40d41686c1f5cc0/html5/thumbnails/29.jpg)
Shifts: variable costs
An increase in the wage rate or another component of variable cost
• Shifts the variable curves (TVC and AVC) upward. • Shifts the marginal cost curve (MC) upward. • Leaves the fixed cost curves (AFC and TFC)
unchanged.