Economics I - Microeconomics Lecture 7: Production Cost and Perfect Competition

Vocabulary flashcards covering production costs, isocost curves, cost minimization strategies, short-run vs long-run cost curves, economies of scale, and the characteristics of perfect competition.

Accounting cost

Actual expenses plus depreciation charges for capital equipment.

Opportunity cost

The cost of forgoing the next best alternative; these are considered economic costs.

Sunk cost

Expenditure that has been made and cannot be recovered.

Isocost Curve

All input combinations yielding the same level of total costs ($C$), represented by the equation $w \cdot L + r \cdot K = C$.

Rental Rate of Capital ($r$)

The cost of using capital ($K$), which covers the cost of renting or the opportunity cost of owning capital.

Cost-Minimizing Production

Finding the input combination with the lowest possible isocost curve to produce a given output level ($q$), represented as $\min_{K,L} C = w \cdot L + r \cdot K$ subject to $f(K,L) = q$.

Interior Solution

The tangency point of the isocost line and isoquant where the slope of the isocost line equals the Marginal Rate of Technical Substitution: $- \frac{w}{r} = MRTS = - \frac{MP_L}{MP_K}$.

Expansion Path

A curve passing through all cost-minimizing points as output ($q$) increases.

Fixed Cost ($FC$)

Costs that do not vary with output ($q$) and occur before the first unit is produced. They can only be avoided by shutting down.

Variable Cost ($VC(q)$)

Costs that vary with the level of output ($q$).

Marginal Cost ($MC$)

The cost of the next unit of output, calculated as $MC = \frac{\partial C}{\partial q}$.

Average (Total) Cost ($ATC$)

The total cost divided by the level of output ($ATC = \frac{C}{q} = \frac{FC + VC}{q}$).

Economies of Scale

A situation where doubling output ($q$) requires less than doubling of total costs ($C$), resulting in a decreasing Long-run Average Cost ($LAC$).

Diseconomies of Scale

A situation where doubling output ($q$) requires more than doubling of total costs ($C$), resulting in an increasing Long-run Average Cost ($LAC$).

Returns to Scale

A concept describing how much total output changes in the long run when all inputs are multiplied by a factor $t > 1$.

Profit Maximization (Interior Solution)

The level of output where Marginal Revenue equals Marginal Cost ($MR(q) = MC(q)$).

Perfect Competition

A market structure characterized by homogeneous products, full transparency, price-taking firms, and easy entry and exit.

Product Homogeneity

When the products of all competing firms in a market are regarded as identical or perfect substitutes by consumers.

Market Transparency

A market condition where all participants (buyers and sellers) have complete information regarding what is offered and at what price.

Price Taker

A firm that must take market prices as given because there are many small firms and no single firm is capable of influencing the price.