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ECONOMICS 200
PRINCIPLES OF MICROECONOMICS
Professor Lucia F. Dunn
Department of Economics
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Technology
Long-Run vs. Short-Run
First we must define variable and fixed factors of production
(or inputs).
(1) Variable Factors:
 One that can be varied quickly and easily to increase or
decrease output within a production unit (or plant) of a
given size.
(2) Fixed Factors:
 Ones that cannot be varied quickly or easily.
 The quantity of the fixed factors determine the size of
the plant.
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Technology
Short-Run:
Long enough to alter the variable
but not the fixed factors of production.
Long-Run:
Long enough to alter both the variable
and the fixed factors of production; but
cannot alter the technology.
Very-Long-Run: Long enough for even the basic
technology to be changed.
3
Technology
INDUSTRY:
 All the firms in one line of business.
 The firms can each have a number of plants.
So there is the following hierarchy:
Industry
Firms
Plants
4
Technology
Production Function
A technical, mathematical relationship that tells the
maximum amount of output that can be produced with a
given set of inputs, given the current state of technical
knowledge.
Total Product (TP) = f (inputs)
or
TP = f (capital, land, labor, ...)
Example:
Corn = f(land, labor, sun)
10 bu.= 1 acre + 5 work hours +
100 watts of sun energy
per square acre.
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Technology
Product Concepts
(1) Total Product  TP.
TP, AP,
MP, ...
(2) Average Product  AP.
 product per unit of an input factor.
 AP of labor (APL) = TP L
 AP of capital (APK) = TP
K
(3) Marginal Product  MP.
The change in TP that comes from using one additional
unit of a factor.
MPL 
TP
L
6
Technology
Example:
Units of Labor
TP
MPL
APL
0
0
--
--
1
1000
1000
1000
2
3000
2000
1500
3
3500
500
1167
4
3800
300
950
5
3900
100
780
7
Relationship Between TP and MP
TP
4,000
3,000
2,000
1,000
Labor
Units (L)
0
MP
1
2
3
4
5
4,000
Diminishing MP
3,000
2,000
1,000
Labor
Units (L) 8
0
1
2
3
4
5
Relationship Between MP and AP
Product
MP
AP
Labor Units
Summary:
(1) If MP is above AP  AP is rising.
(2) If MP is below AP  AP is falling.
(3) If MP is equal AP  AP is peaking out.
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Law of Diminishing Marginal Returns
If additional units of a variable factor are added to a
fixed factor, eventually the marginal product of the
variable factor will decrease.
The Law of Diminishing
Marginal Returns!
10
Cost Concepts
I. Total Costs (TC)
— whatever total cost is for any level of output
Two Sub-Components:
(A)Total Fixed Costs — TFC (Overhead Costs)
— do not vary with output.
(B) Total Variable Costs — TVC
— vary with output.
Note:
TC = TFC + TVC
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Cost Concepts
II. Average Total Costs (ATC)
TC
ATC 
TP
Two
Average
Costs!!
Two Sub-Components:
TFC
TP
(A) Average Fixed Cost:
AFC 
(B) Average Variable Cost:
TVC
AVC 
TP
Note:
ATC = AFC + AVC
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Cost Concepts
III. Marginal Costs (MC)
TC
MC 
TP
13
Cost Concepts
I. Graph of Total Cost Concept
Cost
TC
TVC
(TFC)
TFC
Output or TP
14
Cost Concepts
II. Graph of Average & Marginal Cost Concept
Cost
MC
ATC
AVC
AFC
QC
Output
15
Cost Concept
Summary of Relationship Between Marginal Cost & Average Cost
(1) When marginal is below average  average is falling.
(2) When marginal is above average  average is rising.
(3) When marginal is equal average  average is at its lowest
point.
Definition:
Capacity — The output level that corresponds to the minimum
point on the short-run ATC curve.
Excess Capacity  Producing at any output level smaller than
the capacity level QC.
— By producing more, the firm could get to
cheaper per unit costs.
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