Econ unit 7: Utility maximization

Explicit Cost

a opportunity cost that involves spending cash

Implicit Cost

A firm's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment.

- no cash

- own resources

Accounting profit

total revenue minus total explicit cost

Economic Profit

total revenue - explicit costs - implicit costs

Normal Profit

the accounting profit earned when all resources earn their opportunity cost

Variable Resources

Any resources that can be varied in the short run to increase or decrease production.

Fixed Resource

Any resource that cannot be varied in the short run.

Short Run

A period during which at least one of a firm's resources is fixed.

Long Run

A period during which all resources under the firms control are variable.

Total Product

The total output produced by a firm

Production Function

The relationship between the amount of resources employed and a firm's total product and identifies the maximum quantities of a particular good or service that can be produced per time period with various combinations of resources, for a given level of technology.

Marginal Product

additional output produced by using one more unit of a resource while keeping other inputs constant.

Increasing Marginal Returns

The marginal product of a variable resource increases as each additional unit of that resource is employed.

Law of Diminishing Marginal Returns

As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative.

Fixed cost

Any production cost that is independent of the firms rate of output

Variable Cost

Any production cost that changes as the rate of output changes.

Total Cost

The sum of fixed cost and variable cost, or FC + VC = ?

Average Variable Cost

Variable cost divided by output, or ? = VC/q

Average Total Cost

Total cost divided by output, or ? = TC/q; the sum of average fixed cost and average variable cost, or ? = AFC + AVC.

Long-Run Average Cost Curve

A curve that indicates the lowest average cost of production at each rate output when the size, or scale, of the firm varies; also called the planning curve.

Economies of Scale

Forces that reduce a firms average cost as the scale of operation increases in the long run

Diseconomies of Scale

Forces that may eventually increase a firm's average cost as the scale of operation increases in the long run.

Constant Long-Run Average Cost

A cost that occurs when, over some range of output, long run average cost neither increases nor decreases with changes in firm size.

Lebron

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Isoquant Curve

A curve that shows all the technologically efficient combinations of two resources, such as labor and capital, that produce a certain rate of output.

Property 1 of isoquants

Isoquants farther from the origin represent greater output rates.

Property 2 of Isoquants

Isoquants have negative slopes because along given isoquant, the quantity of labor employed inversely relates to the quantity of capital employed.

Property 3 of Isoquants

Isoquants do not intersect because each isoquant refers to as specific rate of output.

Property 4 of Isoquants

Isoquants are usually convex to the origin.

Marginal Rate of Technical Substitution (MRTS)

The rate at which labor substitutes for capital without affecting output.

Isocost Line

Identifies all combinations of capital and labor the firm can hire for a given total cost.

Expansion Path

The line formed by connecting tangency points.