This economics post goes over some of the most common mistakes that I have
seen students make when turning in homework and completing exams for the
production theory portion of introductory microeconomics. Remember that
this concept is what students will need to understand stand in order to perform
well in all of the production theory chapters including perfect competition,
monopolistic competition, oligopolies and monopolies. Understanding the
theory behind production and the associated relationships between all of the
cost curves is very important and will lead to an easier time performing well
in the later chapters.

First, when first learning about the relationships between all of the
various costs -- marginal cost, variable cost, average variable cost, total
cost, average total cost, fixed cost, and average fixed cost -- don't memorize
the graphs without understanding the numbers that go on behind them. It
is very useful in the beginning to always have a graph or table with the
associated numbers behind the graphs to refer to, especially if you have
questions about the visual representation (the graph). It is important to
remember that each cost has an associated equation and relationship to the
other costs, and it is this interaction that gives the graphs the curves that
they do.

It will also help in the beginning to relate the labor graph (with product
and marginal product) to the cost graph to truly understand the relationships
between these two graphs. For example, it is the relationship between product
and output that gives the marginal cost curve the shape it has which then
drives the shape for most of the other cost curves present in the cost
graph.

Second, there are a lot of new graphs and relationships introduced in this
chapter and it can be easy to be overwhelmed by them. It is important to
go through each graph individually and construct them from scratch to
understand what they are trying to show and how they all relate to each
other. I would recommend beginning with the labor productivity graph,
graphing labor inputs and the associated product produced. We know that
at the maximum of AP (average product) the marginal cost will be at its
minimum. We also know that MC (marginal cost) will intersect AC (average
cost) AVC (average variable cost) and ATC (average total cost) at their minimum
points from below. If you can remember these important points, you should
always be able to double check your graphs to make sure you drew them
correctly.

Third, keep the ideas of short run vs. long run clear. The reasons are
different for the U shaped SRATC (short run average total cost) curve and the
LRATC (long run average total cost) curve. The SRATC curve is U shaped
because of decreasing marginal product while the LRATC curve is U shaped
because of increasing, constant, and decreasing returns to scale. Diseconomies of scale are not related to
diminishing labor productivity because both labor and capital can change in the
long run. Diseconomies of scale occur
due to size of the firm resulting in organizational chaos or other management
style inefficiencies that occur in large operations.

Finally, it is important to understand the relationships between marginal
and average variables. Review the prior
economics post on the relationship between marginal and average variables for a
good review.

## 8/8/12

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Common mistakes students make when learning production theory

# Common mistakes students make when learning production theory

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Posted by
Jeff

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costs,
marginal costs,
market structures,
production