ECO206 Chapter 11 - Production and Cost Analysis I

production

the name given to the transformation of factors into goods and services

firm

an economic institution that transforms factors of production into goods and services

profit

is determined by taking the difference of total revenue and total cost

total cost

explicit payments to the factors of production plus the opportunity cost of the factors provided by the owners of the firm

total revenue

the amount a firm receives for selling its product or service plus any increase in the value of the assets owned by the firm

economic profit

is determined by taking the difference of explicit/implicit revenue and explicit/implicit cost

long-run decision

when a firm chooses among all possible production techniques

short-run decision

when a firm is constrained in regard to what production decisions it can make

production table

a table showing the output resulting from various combinations of factors of production or inputs

marginal product

the additional output that will be forthcoming from an additional worker, other inputs constant

average product

the output per worker

production function

the relationship between the inputs (factors of production) and outputs

Law of Diminishing Marginal Productivity

states that as more of a variable input is added to an existing fixed input, the additional output one gets from that additional input is eventually going to fall

fixed costs

costs that are spent and cannot be changed in the period of time under consideration

variable costs

costs that change as output changes

average total cost

is determined by dividing total cost by the quantity produced (output)

average fixed cost

is determined by dividing the fixed cost by the quantity produced (output)

average variable cost

is determined by dividing the variable cost by the quantity produced (output)

marginal cost

the increase/decrease in total cost from increasing/decreasing the level of output by 1 unit