Economics of Production and Cost Curves

Vocabulary flashcards covering key definitions, relationships, and calculations related to firm costs, production functions, and cost curves from Chapters 13 and 14.

Total Cost

The total market value of the inputs a firm uses in production, which can be divided into fixed costs and variable costs.

Fixed Cost

Costs that do not vary with the quantity of output produced, remaining constant even if the firm produces zero units.

Variable Cost

Costs that change as the firm alters the quantity of output produced, such as the cost of raw materials (lemons and sugar), and equal $0 when output is zero.

Marginal Cost

The increase in total cost that arises from producing an additional unit of output.

Average Fixed Cost

Fixed cost divided by the quantity of output produced ($\text{AFC} = \frac{\text{FC}}{Q}$), which must always fall as the quantity of output increases.

Average Variable Cost

Variable cost divided by the quantity of output produced ($\text{AVC} = \frac{\text{VC}}{Q}$).

Average Total Cost

Total cost divided by the quantity of output produced ($\text{ATC} = \frac{\text{TC}}{Q}$); it is very high at small output levels because average fixed cost is high.

Marginal-Average Cost Relationship

Whenever marginal cost is greater than average total cost ($\text{MC} > \text{ATC}$), average total cost is rising; whenever marginal cost is less than average total cost ($\text{MC} < \text{ATC}$), average total cost is falling.

Accounting Profit

Total revenue minus explicit total costs; changes in implicit opportunity costs (such as alternative salary offers) do not alter accounting profit.

Cumulative GPA Analogy

An illustration of average and marginal concepts: a student's cumulative GPA (average) falls next semester only if their performance next semester (marginal) is worse than their cumulative GPA.

Teacher's Helper Fixed Costs

The monthly fixed costs incurred by Teacher's Helper, amounting to $1,080 per month ($600 office rent + $480 leased computer equipment).

Marginal Cost Calculation

The incremental cost calculated as $\text{MC} = \text{TC}_n - \text{TC}_{n-1}$; for example, if total cost for 99 units is $4,000 and the 100th unit has a marginal cost of $200, the total cost for 100 units is $4,200.