Cost Concepts and Production Economics (Short Run & Long Run)

Vocabulary flashcards covering fixed, variable, and long-run costs; short-run vs long-run cost structures; economies of scale (internal and external); returns to scale; and profit maximization concepts from the lecture notes.

Fixed cost

A cost that does not vary with the level of output in the short run (e.g., rent); it remains the same regardless of production.

Rent (as fixed cost)

An example of fixed cost: payment for a building that stays constant whether production occurs or not.

Average fixed cost (AFC)

Fixed cost per unit of output; falls as output increases (AFC = FC / Q).

Rectangular hyperbola (AFC curve)

The typical shape of the AFC curve, reflecting that AFC falls as output rises, forming a rectangular hyperbola when plotted.

Variable cost

Costs that vary with the level of output (e.g., raw materials, wages, fuel).

Average variable cost (AVC)

Variable cost per unit of output; typically U-shaped in the short run (AVC = VC / Q).

Semi-variable cost (semi-fixed cost)

Cost that is fixed up to a certain output level and then becomes variable (or vice versa).

Total cost (TC) in the short run

Sum of fixed and variable costs: TC = FC + VC.

Average total cost (ATC)

Total cost per unit of output; ATC = TC / Q; ATC = AVC + AFC; usually U-shaped in the short run.

Marginal cost (MC)

Additional cost of producing one more unit; MC = ΔTC / ΔQ (or the derivative of TC with respect to Q).

Long run (costs)

All costs are variable; there are no fixed costs; total cost equals variable cost; long-run average cost is the envelope of short-run cost curves.

Long-run total cost (LRTC)

Total cost when all inputs are variable (no fixed costs).

Economies of scale

Cost advantages from increasing production scale; average cost falls as output rises (bulk buying, specialization, etc.).

Minimum efficient scale (MES)

The output level at which long-run average cost is minimized and economies of scale are fully exploited.

Internal economies of scale

Cost advantages that arise inside the firm as it grows: technical, commercial, financial, and risk-bearing economies.

Technical economies of scale

Efficiency gains from larger or more advanced technology and plant size.

Commercial economies of scale

Savings from bulk purchasing, distribution, and marketing due to larger scale.

Financial economies of scale

Lower financing costs and better terms obtained by larger firms.

Risk-bearing economies of scale

Spreading fixed costs and risks over a larger output or product range.

External economies of scale

Benefits accruing to all firms in an industry due to location, networks, or supplier clusters (outside the firm).

Returns to scale

Relation between proportional changes in all inputs and output: increasing returns to scale, constant returns to scale, or diminishing returns to scale.

Short-run vs long-run cost curves

In the short run some costs are fixed; in the long run all costs are variable; the long-run average cost curve is the envelope of short-run average cost curves.

Profit

Total revenue minus total cost (TR − TC); normal profit occurs when TR = TC; abnormal/supernormal profit when TR > TC.

Profit maximization (MR = MC)

Firms maximize profit where marginal revenue equals marginal cost; in perfect competition, AR = MR = P.

Perfect competition (key feature)

Many firms, identical products, price takers; AR = MR = Price; firm’s demand is perfectly elastic.

AR and MR in perfect competition

Average revenue (AR) equals price; marginal revenue (MR) equals price and is constant with output; MR = AR.

MC and AVC/ATC interaction

MC intersects AVC and ATC at their minimum points (MC cuts the minimum of AVC and ATC).