Chapter 7: Production Costs

Total Fixed Cost (TFC)

Costs that remain constant regardless of the level of production, such as rent and utility bills.

Variable Cost

Costs that fluctuate with the level of production, like hourly wages for workers and raw material expenses.

Total Product

The overall quantity of goods or services produced, indicating the production process's output level.

Total Variable Cost

the total of all variable costs for a given level of production

Total Cost

the sum of the total fixed and total variable cost

Economies of Scale

increasing output leads to more efficient use of resources, variable cost per unit decreases

Diseconomies of Scale

increasing production leads to inefficiencies, variable cost per unit rising long term

Average Fixed Cost (AFC) Decrease

As you produce more units, the fixed cost Is spread out more units, making it cheaper

Average Total Cost (ATC) Decrease then Increase

Initially decreases due to lower variable costs but rises as production increases and variable costs escalate.

Law of Diminishing Marginal Returns

Adding more resources leads to diminishing additional output due to fixed resource constraints.

Marginal-Average Rule

Examines the impact of adding each unit of input on production costs in the short term.

Marginal Product

Focuses on the additional output generated by adding one more unit of input.

Returns to Scale

Evaluates a firm's efficiency as it adjusts production scales, considering long-term gains or losses.

Increasing Returns to Scale

Output double more when inputs are doubled.

Constant Returns to Scale

Output doubles when inputs are doubled.

Decreasing Returns to Scale

Output increases less than double when inputs are doubled.