cost and production

Sole proprietorship

A firm owned by a single individual

Partnership

A firm owned and usually operated by several individuals who share in the profits and bear personal responsibility for any losses

Unlimited liability

Each owner is held personally responsible for the obligations of the firm

Fixed inputs

An input whose quantity must remain constant, regardless of how much output is produced

Variable input

An input whose usage can change as the level of output changes

Total product

Maximum quantity of output that can be produced from a given combination of inputs

Marginal product of labor

Tells us the rise in output produced when one more worker is hired, leaving all other inputs unchanged

Increasing marginal returns to labor

When the marginal product of labor increases as employment rises

Diminishing marginal returns to labor

When the marginal product of labor is decreasing as employment rises

Law of diminishing (marginal) returns

States that as we continue to add more of any one input (holding the other inputs constant) its marginal product will eventually decline

Sunk cost

One that already has been paid, or must be paid, regardless of any future action being considered

Explicit costs

Costs involving actual payments or money actually paid out for the use of inputs

Implicit costs

The cost of inputs for which there is no direct money payment

Average fixed cost (AFC)

Total fixed cost divided by the quantity of output produced

Average Variable Cost (AVC)

Total variable cost divided by the quantity of output produced

Average total cost (ATC)

Total cost divided by the quantity of output produced

Marginal cost

Tells us how much cost rises per unit increase in output

Long-run total cost

The cost of producing each quantity of output when the least-cost input mix is chosen in the long run

Long-run average total cost

The cost per unit of output in the long run, when all inputs are variable

Economies of scale

When an increase in output causes long-run average total cost to decrease

Diseconomies of scale

When long-run average total cost increases as output increases

Constant returns to scale

When both output and long-run total cost rise by the same proportion, keeping long-run average total cost flat