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Study Session 4 - Reading 17 Outputs and Costs

Sunday, August 24, 2008


1:52 PM

• Short run vs long run


o SR - firm can adjust some but not all of its production factors. Some
resources are variable while others are fixed
o LR - firm can alter all factors of production

• Total product of labor is bow much a firm is able to increase short run output by
increasing the amount of labor used
o REVIEW CALCULATIONS AND GRAPHS ON PAGES 4-98 to 4-99
• Diminishing marginal returns
o More and more labor are combined with a fixed amount of other factors,
total output will increase but eventually at a diminishing rate
o REVIEW GRAPH ON PAGE 4-100

• REVIEW GRAPH ON PAGE 4-102


o The ATC curve lies above the variable cost curve because it contains both
fixed and variable costs
o When the ATC and AVC curvesare declining, the marginal costs curves lies
beneath them
o When the ATC and AVC curves are increasing, the marginal cost curve lies
above them.
o MC curve crosses the ATC and AVC curves at their min levels

• REVIEW GRAPH ON PAGE 4-105


o The LRAC is a combination of all the SR ATC curves and is formed from the
minimum level of each curve
o Economies of scale lead to falling LRAC as output increases. Slopes
downward
o Diseconomies of scale lead to rising LRAC as output increases. Slopes
upward