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Chapter Review Chapter 6: The Firm’s Costs

  1. A firm’s production function specifies the level of output resulting from any combination of inputs. The increase in output corresponding to a unit increase in any input is the marginal product of that input.
  2. Short-run marginal cost curves are generally upward sloping, because diminishing returns to a factor of production imply that it will take ever-increasing amounts of the input to produce a marginal unit of output.
  3. The typical short-run average cost curve is U-shaped. When an average cost curve is U-shaped, the marginal and average cost curves will intersect at the minimum point of the average cost curve.
  4. Economists often distinguish between short-run and long-run cost curves. In the short run, a firm is generally assumed not to be able to change its capital stock. In the long run, it can. Even if short-run average cost curves are U-shaped, long-run average cost curves can take on a variety of shapes, including flat and continuously declining as well as declining and then increasing.
  5. When a number of different inputs can be varied, and the price of one input increases, the change in relative prices of inputs will encourage a firm to substitute relatively less expensive inputs; this is an application of the principle of substitution.
  6. Economies of scope exist when it is less expensive to produce two products together than it would be to produce each one separately.
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