Production Function and Costs of Production

These flashcards cover essential vocabulary related to the production function and costs in economics.

Production Function

The relationship between the inputs employed by a firm and the outputs it produces.

Product Market

A marketplace where goods and services are bought and sold.

Factor Market

A marketplace where factors of production are bought and sold.

Factors of Production

Inputs used to produce goods and services, including labor and capital.

Fixed Costs

Costs that do not change with the level of output produced.

Variable Costs

Costs that change with the level of output produced.

Total Revenue (TR)

The total money a firm brings in from sales, calculated as price multiplied by quantity sold.

Accounting Profit

Total revenue minus explicit costs.

Economic Profit

Total revenue minus both explicit and implicit costs.

Total Product

The total quantity of output produced by a firm in a given period.

Average Product (AP)

Total product divided by the number of units of labor used.

Marginal Product (MP)

The additional output produced as a result of adding one more unit of labor.

Law of Diminishing Marginal Product

As more units of a variable input are added to fixed inputs, the additional output generated eventually decreases.

Average Fixed Cost (AFC)

Fixed cost per unit of output, which decreases as output increases.

Average Variable Cost (AVC)

Variable cost per unit of output, which can initially decrease and then increase as output increases.

Average Total Cost (ATC)

Total cost per unit of output; it includes both fixed and variable costs.

Marginal Cost (MC)

The change in total cost that arises from producing one additional unit of output.

Short Run

A period in which at least one input is fixed while others can vary.

Total Fixed Cost (TFC)

The total cost of fixed inputs, which remains constant regardless of output.

Total Variable Cost (TVC)

The total cost of variable inputs, which changes with the level of output.