Micro 3.3

VSR or market period when no additional output is possible. The supply curve is perfectly vertical.
SR: when at least one input is fixed (because of market prices and technological constraints of fixed factor of production) but quantities of other inputs can be varied
LR: when all inputs can be varied
not calendar time; rather time it takes to convert a fixed into a variable input
in this way Economics incorporates time as a variable and ‘dynamic’ analysis becomes possible, i.e. what will the future be; in this sense ‘predictive’ not just ‘descriptive’

by definition, one input of production fixed
during this period the firm can produce varying levels of output based ONLY on how much variable input is used – Total Product (P&B 4th Ed. Fig 11.1; 5th Ed. Fig. 10.1; 7th Ed Fig. 11.1); at each level of output one can measure the Average Product (P&B 4th Ed. Fig 11.3; 5th Ed. Fig 10.3; 7th Ed Fig. 11.3) produced per unit of the variable input; at each level of output one can measure the increase in output per unit increase of the variable input – Marginal Product (P&B 4th Ed. Fig. 11.2; 5th Ed. Fig. 10.2; 7th Ed Fig. 11.2)
curves display first increasing and then diminishing marginal returns as level of output increases

distinguish between fixed and variable costs associated with different inputs
Total Cost (TC) = TFC + TVC (P&B 4th Ed. Fig. 11.4; 5th Ed. Fig. 10.4; 7th Ed Fig. 11.4)
Average Fixed Cost (AFC) = fixed cost per unit output
Average Variable Cost (AVC) = variable cost per unit output
Average Total Cost (ATC) = fixed (AFC) + variable (AVC) cost per unit output

Note:

i - (P&B 4th Ed. Fig. 11.4; 5th Ed. Fig. 10.4; 7th Ed Fig. 11.4) narrowing of TC – TVC as level of output rises;
ii - (P&B 4th Ed. Fig. 11.5; 5th Ed. Fig. 10.5; 7th Ed Fig. 11.5) MC curve cuts AC curve at lowest point
– as long as MC < AC, AC continues to fall, if MC > AC then AC rises, at minimum of AC = MC
iii – (P&B 4th Ed. Fig. 11.5; 5th Ed. Fig. 10.5; 7th Ed Fig. 11.5) ‘U-shaped’ AC Curve reflects: spreading fixed costs over larger output but eventual diminishing marginal returns

LR a sequence of SR scenarios, when series of SRs become LR is open question
over time market and technological constraints relax, factor prices change, fixed inputs becomes variable, tastes change, technology changes
if technology improves Product Curve shifts up and costs down per unit output (do more for less)
if factor prices change shift cost curves; how depends on which cost; (PB 4th Ed. Fig. 11.5; 5th Ed. Fig. 10.5; 7th Ed Fig. 11.5) if fixed costs increase TFC curve moves up shifting TC but leaving variable cost curves unaffected – AVC & MC; if variable cost goes up, then fixed cost curve remains constant but variable cost curves shift up as well as TC
LR AC (P&B 4th Ed. Fig 11.8; 5th Ed. Fig. 11.8; 7th Ed Fig. 11.8) is a sequence of SR AC at different ‘scale of production’, i.e. increasing size of capital plant and equipment, LR AC the envelop of SR curves (variations MBB 10th Ed. Figs 7.8, 7.9a, 7.9b & 7.9c; MBB 11th Ed. Figs 6.8, 6.9a, b & c; P&B not displayed)
when fixed input becomes variable, i.e. capital, increases in capital (assuming homogenous function) will exhibit eventual diminishing marginal returns
to degree increases in capital reflect increase in scale have familiar pattern of initially increasing marginal returns, often a sector of constant returns to scale, and eventual declining returns to scale

firm supply curve, (P&B 4th Ed. Fig. 12.5 , 5th Ed. Fig. 11.5; 7th Ed Fig. 12.5 )
industry supply curve (P&B 4th Ed. Fig. 12.6; 5th Ed. Fig. 11.6; 7th Ed Fig. 12.6)
where actually produce depends on marginal revenue or MR; go out of business if VC not fully covered; stay in business in SR if all VC covered
industry supply curve: horizontal summation of individual firm MC above AC

In effect, Supply reduces to the constrained maximization of output by the firm subject to the cost constraint represented by two equations:

1. Q = g (K, L)

2. C = P_KK + P_LL