# Production and Costs - "The Economics of the Lemonade Stand" - 4 main cost measures - Average fixed costs - Average variable costs - Average total costs - Marginal costs ## The Production Process - Input -> Production Process -> Output - _Production function_ = the relation between inputs and the Q of outputs - Variable Input, usually labor - Fixed Input, usually capital - Possible: fixed input in the short-run, but variable input in the long-run. - Short-run = all inputs are fixed - Long-run = all inputs are variable ## Introducing Costs > [!tip] Definition _Marginal Product of Labor_ = the additional quantity of > output obtained from using one more unit of labor, slope of Product of Labor > curve $ MP_L = \frac{\Delta Q}{\Delta L} $ - Total Cost = Fixed Cost + Variable Cost - Total Product Curve and Total Cost Curve are mirror to each other > [!tip] Definition _Marginal Cost_ = the change in total cost arising from > producing one more unit of output. slope of Total Cost Curve $ MC = \frac{\Delta TC}{\Delta Q} $ - Average Fixed Cost = Fixed Cost / Output - ATC = AVC + AFC - Marginal Cost curve crosses the lowest point of ATC curve. - If Marginal Cost < Average Total Cost, MC is pulling down the ATC, hence ATC is decreasing. - If MC > ATC, MC is pulling up the ATC, hence ATC is increasing ## Conclusion to Production - Natural Monopolies = lowering the Average Fixed Cost - Higher marginal productivity per labor -> higher wages