Production Costs in the Short Run

1. Total product (TP)equals the total amt of output (Q) produced.
2.Marginal product (MP) equals the change in total product resulting from a one-unit incr in the quantity of an input employed.
3. Avg product (AP) equals the total product/the quantity of an input.

If we add one more employee, how many addt'l units will be produce?
For ex, the marginal product of labor (L) is:
MP_L = change in TP / change in L

For ex, the avg product of labor (L) is:
AP_L = TP / L

When more & more units of an input are combined with a fixed amt of other inputs, output increases but at a diminishing rate.
For ex, adding addt'l workers to the production process, while holding the amt of other inputs constant, causes output to increase at a decreasing rate.

1. Avg. fixed cost (AFC) = FC/ Q
2. Avg. var cost (AVC) = VC/ Q
3. Avg. total cost (ATC) = TC/ Q
*TC = FC + VC
4. Marginal cost = change in TC / change in Q

The change in TC associated with a change in output quantity over a period of time.
a. marginal cost depends solely on VC
b. FC do not influence marginal costs
Produce another unit, so long as marginal rev > marginal cost

A. In the long run, all resource inputs are variable.
B. To be in position to produce at the lowest possible cost means adjusting the scale of production by adjusting plant size or # of plants.
C. Generally the long-run avg total cost (LRATC) curve is U-SHAPED. Therefore, the optimal size or # of plants is at the min point of the LRATC curve.

Companies that are able to reduce per unit costs by using large plants to produce large amts of output are said to have economies of scale.
*Economies of scale are reductions in unit costs resulting from incr size of operations.
*In the long run, economies of scale will cause the LRATC curve to decline within the range of production.

1. Opportunity for specialization
2. Utilization of advanced technology
3. Mass production is normally more efficient

May occur when these large firms become inefficient & are no longer cost productive.
*Are incre in avg costs of operations resulting from problems in managing large-scale enterprises.

1. Bottlenecks & costs of transporting materials.
2. Difficulty of supervising & managing a large bureaucracy (reasons for diseconomies of scale for the firm result almost entirely from the inefficient performance of the mgmt function)

In a perfectly competitve mkt, no indiv firm can influence the mkt price of its product, nor shift the mkt supply sufficiently to make a good more scarce or abundant.

A. a large # of suppliers & customers acting independently. Frims are small relative to the industry.
b. no barriers to entry bc firms exert no influence over the mkt or price.
c. very little product differentiation (homogeneous products)
d. firms are price takers. price is set by the mkt.
e. firms control only quantiy produced. each firm can sell as much or as little as it wants at the given mkt price
f. demand is perfectly elastic
g. bc there are no barriers to entry, the entry & exit of new firms ensures that economic profits are zero in the long run, thus firms earn a normal rate of return.

Strategic plans may include maintaining the mkt share & responsiveness of the sales price to mkt conditions.

Exists when many sellers compete to sell a differentiated product in a mkt into which the entry of new sellers is possible (e.g. brand name cosmetic products)