- A
production function indicates the maximum amount of output that can
be produced with different combinations of inputs (resources, factors
of production). It is a technological relationship and changes (shifts)
when new technology or new management techniques are discovered.
- In
the short run, some inputs (for example, land or capital) are fixed
in quantity. Increases in short run output result from more use of
variable inputs (e.g., labor, raw materials).
- The
contribution of a variable input to total output is measured by its
marginal physical product (MPP). This is the amount by which
total output increases when one more unit of the input is employed.
- The
MAP of a factor tends to decline as more of it is used in a given
production facility. Diminishing marginal returns results from
crowding more of a variable input into a production process, reducing
the amount of fixed inputs per unit of variable input.
- Marginal
cost is the increase in total costs that results when output is
increased by one unit. Marginal costs increase whenever marginal physical
product diminishes.
- Not
all costs go up when the rate of output is increased. Fixed costs
(i.e., space and equipment lease costs) do not vary with the rate
of output. Only variable costs (i.e., labor and materials costs)
go up when output is increased.
- Average
total costs (ATC) equals total costs divided by the quantity of
output produced. ATC declines whenever marginal cost (MC) is less
than average cost, and rises when MC exceeds it. The MC and the ATC
curves intersect at minimum ATC (the bottom of the U). That intersection
represents least cost production.
- The
economic costs of production include the value of all resources used.
Accounting costs typically include those dollar costs actually
paid (explicit costs).
- In
the long run, there are no fixed costs; the size (scale) of production
can be varied. The long run is sometimes referred to as the "planning
horizon." The long run ATC curve indicates the lowest cost of
producing output with facilities of appropriate size.
- Economies
of scale refer to reductions in minimum average cost attained
with larger plant size (scale). If minimum ATC rises with plant size,
diseconomies of scale exist.
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