Production and Cost Theory

Flashcards covering key concepts from the lecture on Production and Cost Theory.

Production

The process of using factors of production to produce goods and services.

Factors of Production

Goods and services that assist the production process; includes land, labour, capital, and entrepreneurship.

Short Run

A period in which at least one input is fixed while others can vary.

Long Run

A period in which all inputs are variable.

Diminishing Marginal Returns

The principle stating that if increasing quantities of a variable input are added to a fixed input, the marginal product will eventually decrease.

Total Product (TP)

The total output produced by a firm using its inputs.

Average Product (AP)

Total product divided by the quantity of the variable input used.

Marginal Product (MP)

The change in total product resulting from a one-unit change in the variable input.

Explicit Costs

Direct monetary payments made for inputs purchased by a firm.

Implicit Costs

The opportunity costs of using resources owned by the firm.

Average Cost (AC)

Total cost divided by total output, or the sum of average fixed cost and average variable cost.

Economies of Scale

The property whereby long-run average total cost decreases as the quantity of output increases.

Diseconomies of Scale

The property whereby long-run average total cost increases as the quantity of output increases.

Production Function

A mathematical expression showing the relationship between inputs and outputs.

Marginal Cost (MC)

The change in total cost that arises when production is increased by one unit.

Relationship between MP and TP

When marginal product (MP) is increasing, total product (TP) increases at an increasing rate; when MP is decreasing, TP increases at a decreasing rate.

Long-run Average Cost Curve

A curve that typically exhibits a U-shape due to economies and diseconomies of scale.

Fixed Costs

Costs that do not change with the level of output.

Variable Costs

Costs that change with the level of output.

Marginal Revenue (MR)

The additional revenue gained from producing one more unit of output.