Review Notes - Short-Run Production and Costs

- Short-Run Production.

- Definitions.

- Total Physical Product of Labor (TPP_L), what does it look like in a graph?

- MPP_L = change in TPP_L(change in Q) ÷ change in L. What is MPP_L? What is the relationship between TPP_L and MPP_L?

- APP_L = TPP_L(Q) ÷ L. What is APP_L. What is the relationship between MPP_L and APP_L?

- The law of diminishing marginal productivity - As the use of labor increases in the short-run, ceterus paribus, the output produced by the last worker hired must eventually fall - why is this true?

- Graphs and the relationship between the graphs.

- Short-Run Costs.

- Definitions.

- Total Fixed Cost (TFC) = the cost of all inputs which are fixed in the short run => TFC does not vary as Q changes.

- Total Variable Cost (TVC) = wage (w) * Labor (L) = wL.

- Total Cost (TC) = TVC + TFC.

- Marginal Cost = change in TC ÷ change in Q = change in TVC/change in Q. What does MC really stand for? The cost of producing the last unit.

- Average Variable Cost (AVC) = TVC ÷ Q.

- Average Fixed Cost (AFC) = TFC ÷ Q.

- Average Total Cost (ATC or AC) = TC ÷ Q.

- ATC AVC + AFC.

- Graphs - You need to know what the graphs are and what the relationship between the various concepts are on the graphs.

- What does TC, TVC, and TFC look like on a graph?

- What does ATC, AVC, AFC, and MC look like on a graph?

- What is the relationship between MC and AVC? MC and ATC? ATC and AVC?

- Relationship between production and costs.

- if MPP_L increases (or decreases) => what happens to MC, AVC, ATC, AFC? Why?

- if APP_L increases (or decreases) => what happens to MC, AVC, ATC, AFC? Why?