ANNOUNCEMENTS

1
ANNOUNCEMENTS
EXAM II Thursday, November 11. Covers chapters
7-11 and 13. Review class Tuesday, November 9
1130-1230 in LC 22.
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SHORT-RUN PRODUCTION FUNCTION
The marginal product of labor (MPL) is MPL
DQ/DL. The marginal product of labor
is the additional out produced by an additional
unit of labor. Marginal product begins to fall
at the point of diminishing returns.
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THE SHORT-RUN COST FUNCTION
Since TC is on the y-axis and Q is on the
x-axis, MCDTC/DQ is the slope of the TC curve.
Then MC is falling up to
TC
Point of diminishing returns
DTC
DQ
FC
the point of diminishing returns, and rising
after the point of diminishing returns.
4
COSTS
When MC lt ATC, ATC is falling, MC gt
ATC, ATC is rising, MC lt AVC, AVC is
falling, MC gt AVC, AVC is
rising. MCAVC at the minimum of AVC and MCATC
at the minimum of ATC.
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COSTS

MC equals AVC and ATC at their respective
minimums.
MC
ATC
AVC
AFC

Q
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COSTS

When MC is below AVC, AVC is falling and when it
is above AVC, AVC is rising. When MC is below
ATC, ATC is falling and when it is above ATC,
ATC is rising.
MC
ATC
AVC
AFC

Q
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LONG-RUN COSTS
In the long-run, all inputs are variable so that
there are no fixed costs. Therefore VC and TC
are the same, as are AVC and ATC. In general as
a firm grows to produce larger outputs it can
incorporate more efficient technology and more
specialized resources, so that the average cost
of production will fall with the output
level. This is known as economies of scale.
However,
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LONG-RUN COSTS
eventually average costs will begin to rise
with output in the stage of diseconomies of
scale. One reason for diseconomies of scale is
that once a firm becomes very large, internal
communication is very difficult and coordination
of the firms activities becomes inefficient.
The range of output where average cost is
constant is the range of constant returns to
scale.
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LONG-RUN COSTS

SATC2
SATC1
LATC
economies of scale
diseconomies of scale
constant returns to scale