Behind the Supply Curve: Inputs and Costs

Flashcards covering key vocabulary and concepts related to the supply curve, inputs, and costs in economics.

Firm

An organization that produces goods or services for sale.

Production

The process of turning inputs into outputs.

Production Function

The relationship between the quantity of inputs a firm uses and the quantity of output it produces.

Fixed Input

An input whose quantity is fixed for a period of time and cannot be varied.

Variable Input

An input whose quantity the firm can vary at any time.

Long Run

The period in which all inputs can be varied.

Short Run

The period in which at least one input is fixed.

Total Product Curve

Shows how the quantity of output depends on the quantity of the variable input for a given quantity of the fixed input.

Marginal Product of an Input

The additional quantity of output that is produced by using one more unit of that input.

Marginal Product of Labor (MPL)

The change in output resulting from a one-unit increase in the amount of labor input (ΔQ/ΔL).

Diminishing Returns to an Input

An increase in the quantity of that input, holding the levels of all other inputs fixed, reduces that input’s marginal product.

Fixed Cost

A cost that does not depend on the quantity of output produced; the cost of the fixed input.

Variable Cost

A cost that depends on the quantity of output produced; the cost of the variable input.

Total Cost (TC)

The sum of the fixed cost and the variable cost of producing that quantity of output: TC = FC + VC.

Total Cost Curve

Shows how total cost depends on the quantity of output.

Marginal Cost (MC)

The change in total cost generated by one additional unit of output: MC = ΔTC/ΔQ.

Average Total Cost (ATC)

Total cost per unit of output produced: ATC = TC/Q.

Average Fixed Cost (AFC)

Fixed cost per unit of output produced: AFC = FC/Q.

Average Variable Cost (AVC)

Variable cost per unit of output produced: AVC = VC/Q.

Spreading Effect

The larger the output, the more output over which fixed cost is spread, leading to lower average fixed cost.

Diminishing Returns Effect

The larger the output, the more variable input required to produce additional units, which leads to higher average variable cost.

Minimum-Cost Output

The quantity of output at which average total cost is lowest—the bottom of the U-shaped average total cost curve.