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1

Production Function

The way a firm combines inputs to produce an output

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Variable Inputs

inputs that can be changed in the short run to change production

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3

Fixed Inputs

Inputs that cannot be changed in the short run to change production

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4

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)

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5

Plant Capacity

a firm's maximum potential level of production

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6

Long Run

the time period in which all inputs can be varied

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7

Total Product

Total Quantity of output produced by a certain amount of inputs

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8

Marginal Product

The additional output produced by one more unit of variable input (often labor)

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9

Average Product

The average quantity of output produced by one unit of a variable input (often labor)

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10

Specialization

A focus on a particular activity or area of study

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11

Diminishing Returns

the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases

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12

why does diminishing marginal returns occur?

More variable inputs are added to fixed amount of fixed inputs

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13

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)

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14

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

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15

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)

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16

Variable Cost

A cost that changes as output changes

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17

Total Cost

the sum of fixed and variable costs

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18

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)

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19

Average Fixed Cost (AFC)

fixed cost divided by the quantity of output

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20

Average Variable Cost (AVC)

variable cost divided by the quantity of output (VC/Q)

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21

Average Total Cost (ATC)

total costs divided by quantity of output (TC/Q); AFC+AVC = ATC

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22

U-Shaped Curves

ATC and AVC

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23

Where does MC cross the ATC and AVC Curves?

At their lowest points

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24

Always decreasing cost curve

AFC

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25

Long Run Costs

all costs are variable, no fixed costs

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26

Increasing Returns to Scale

Output is increasing at a faster rate than all inputs

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27

Decreasing Returns to Scale

Output is increasing at a slower rate than all inputs

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28

Constant Returns to Scale

Output is increasing at the same rate as all inputs

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29

Economies of Scale

Long-Run ATC decreases as output increases

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30

Diseconomies of Scale

Long-Run ATC increases as output increases

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31

Constant Returns to Scale (Efficient Scale)

Long-Run ATC is constant as output increases

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32

Minimum Efficient Scale

Determines the number of firms in a market

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33

Where should a firm produce in the long-run?

At the place where Long-Run ATC is minimized

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34

Economic Profit

total revenue minus total cost, including both explicit and implicit costs

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35

Accounting Profit

total revenue minus total explicit cost

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36

Implicit Costs

The money value of an opportunity cost

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37

Explicit Costs

Money spent on materials, utilities, labor, rent, capital, etc.

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38

Normal Profit

Covers the explicit costs and forgone income (zero economic profit)

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