Foundations of Microeconomics - Production and Cost Flashcards

These vocabulary flashcards cover the fundamental concepts of production and cost in microeconomics, including explicit and implicit costs, short-run and long-run production relationships, and various cost measurements.

Accounting Cost

A measure of cost designed to ensure a firm pays the correct amount of income tax and to demonstrate to banks how loan funds have been utilized.

Opportunity Cost

The highest-valued alternative forgone; for a firm, it is the cost of the factors of production it employs to attract them from their best alternative use.

Explicit Cost (EC)

A cost that is paid directly in money.

Implicit Cost (IC)

An opportunity cost incurred by a firm when it uses a factor of production for which it does not make a direct money payment, such as economic depreciation and the use of the owner's resources.

Economic Depreciation

The opportunity cost of a firm using capital that it owns, measured as the change in the market value of that capital over a specific period.

Normal Profit

The return to entrepreneurship and a part of a firm's opportunity cost; it represents the cost of the entrepreneur not running an alternative firm.

Economic Profit

The difference between total revenue and total cost ($Economic Profit = Total Revenue - Total Cost$), where total cost is the sum of explicit and implicit costs.

Short Run

A time frame in which the quantities of some resources, typically capital (the plant), are fixed.

Long Run

A time frame in which the quantities of all resources can be changed.

Sunk Cost

A cost that has already been incurred and is irrelevant to the firm's future decisions.

Total Product (TP)

The total quantity of a good produced in a given period, which increases as the quantity of labor employed increases.

Marginal Product (MP)

The change in total product that results from a one-unit increase in the quantity of labor employed, calculated as $MP = \frac{\Delta TP}{\Delta L}$.

Increasing Marginal Returns

Occur when the marginal product of an additional worker exceeds the marginal product of the previous worker, typically due to increased specialization and division of labor.

Decreasing Marginal Returns

Occur when the marginal product of an additional worker is less than the marginal product of the previous worker, often because more workers are using the same equipment and workspace.

Law of Decreasing Returns

The principle that as a firm uses more of a variable input (like labor) with a given quantity of fixed inputs (like capital), the marginal product of the variable input eventually decreases.

Average Product (AP)

Total product per worker employed ($AP = \frac{TP}{L}$), also referred to as productivity.

Total Fixed Cost (TFC)

The cost of a firm's fixed factors of production, such as land, capital, and entrepreneurship, which does not change as output changes.

Total Variable Cost (TVC)

The cost of the variable factor of production (labor), which changes as the firm's output changes.

Total Cost (TC)

The sum of total fixed cost and total variable cost ($TC = TFC + TVC$).

Marginal Cost (MC)

The change in total cost resulting from a one-unit increase in total product ($MC = \frac{\Delta TC}{\Delta Q}$).

Average Fixed Cost (AFC)

Total fixed cost per unit of output ($AFC = \frac{TFC}{Q}$).

Average Variable Cost (AVC)

Total variable cost per unit of output ($AVC = \frac{TVC}{Q}$).

Average Total Cost (ATC)

Total cost per unit of output ($ATC = AFC + AVC$ or $ATC = \frac{TC}{Q}$).

U-Shaped ATC Curve

The shape of the average total cost curve resulting from two opposing forces: spreading total fixed cost over a larger output and decreasing marginal returns.

Economies of Scale

A condition where output increases by a larger percentage than the increase in plant size and labor, leading to a decrease in average total cost.

Diseconomies of Scale

A condition where output increases by a smaller percentage than the increase in plant size and labor, leading to an increase in average total cost, often due to management complexity.

Constant Returns to Scale

A condition where output increases by the same percentage as the increase in plant size and labor, resulting in a constant average total cost.

Long-Run Average Cost Curve (LRAC)

A curve that traces the lowest attainable average total cost of producing each output when the firm has sufficient time to change both plant size and labor employed.