ENDURING UNDERSTANDING

PRD-1
Firms’ production and cost constraints over different input and output levels shape optimal decisions in the short run and long run.

LEARNING OBJECTIVE

PRD-1.A

  • a. Define (using graphs where appropriate) key terms and concepts relating to production and cost. 
  • b. Explain (using graphs where appropriate) how production and cost are related in the short run and long run.
  • c. Calculate (using data from a graph or table as appropriate) the various measures of productivity and short-run and long-run costs.
ESSENTIAL KNOWLEDGE

PRD-1.A.1

  • The production function explains the relationship between inputs and outputs both in the short run and the long run.

PRD-1.A.2

  • Marginal product and average product change as input usage changes, and hence, total product changes.

PRD-1.A.3

  • Diminishing marginal returns occur as the firm employs more of one input, holding other inputs constant, to produce a product (output) in the short run.