Studied by 17 people
Production Function
The way a firm combines inputs to produce an output
Variable Inputs
inputs that can be changed in the short run to change production
Fixed Inputs
Inputs that cannot be changed in the short run to change production
Short Run
the period of time during which at least one of a firm's inputs is fixed (too short of time to alter its plant capacity)
Plant Capacity
a firm's maximum potential level of production
Long Run
the time period in which all inputs can be varied
Total Product
Total Quantity of output produced by a certain amount of inputs
Marginal Product
The additional output produced by one more unit of variable input (often labor)
Average Product
The average quantity of output produced by one unit of a variable input (often labor)
Specialization
A focus on a particular activity or area of study
Diminishing Returns
the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases
why does diminishing marginal returns occur?
More variable inputs are added to fixed amount of fixed inputs
Slope of the Total Product Line
Marginal Product (when MP is increasing, TP is increasing at an increasing rate; when MP is decreasing, TP is increasing at a decreasing rate; when MP is zero, TP is at its max; when MP is negative, TP is decreasing)
When is Average Product at is Maximum?
When MP = AP. When MP is above AP, AP is rising; when MP is below AP, AP is falling
Fixed Cost
A cost that must be paid even when a firm's output is zero. A cost that is the same at all output levels (e.g. rent)
Variable Cost
A cost that changes as output changes
Total Cost
the sum of fixed and variable costs
Marginal Cost (MC)
The additional cost of producing one more unit of output (MC initially decreases due to specialization, but then rises due to diminishing returns)
Average Fixed Cost (AFC)
fixed cost divided by the quantity of output
Average Variable Cost (AVC)
variable cost divided by the quantity of output (VC/Q)
Average Total Cost (ATC)
total costs divided by quantity of output (TC/Q); AFC+AVC = ATC
U-Shaped Curves
ATC and AVC
Where does MC cross the ATC and AVC Curves?
At their lowest points
Always decreasing cost curve
AFC
Long Run Costs
all costs are variable, no fixed costs
Increasing Returns to Scale
Output is increasing at a faster rate than all inputs
Decreasing Returns to Scale
Output is increasing at a slower rate than all inputs
Constant Returns to Scale
Output is increasing at the same rate as all inputs
Economies of Scale
Long-Run ATC decreases as output increases
Diseconomies of Scale
Long-Run ATC increases as output increases
Constant Returns to Scale (Efficient Scale)
Long-Run ATC is constant as output increases
Minimum Efficient Scale
Determines the number of firms in a market
Where should a firm produce in the long-run?
At the place where Long-Run ATC is minimized
Economic Profit
total revenue minus total cost, including both explicit and implicit costs
Accounting Profit
total revenue minus total explicit cost
Implicit Costs
The money value of an opportunity cost
Explicit Costs
Money spent on materials, utilities, labor, rent, capital, etc.
Normal Profit
Covers the explicit costs and forgone income (zero economic profit)
Note
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