Unit 05: Output and Costs Flashcards

Comprehensive vocabulary flashcards covering the concepts of output, different types of costs (explicit, implicit, fixed, variable, marginal, average), the production function, and economies of scale.

Explicit Costs

Costs that require an actual payment of money, such as wages, rent, ingredient costs, and utility bills.

Implicit Costs

Costs that do not require a direct payment but represent opportunity costs, such as forgone interest earnings or wages for alternative work.

Profit Formula

$$\text{Profit} = \text{Total Revenue} - \text{Total Cost}$$

Short Run

A period during which at least one factor of production is fixed, such as a factory's size.

Long Run

A period in which all factors of production are variable, allowing firms to adjust all inputs including factory size.

Production Function

The relationship between the quantity of inputs used in production and the resulting quantity of output produced.

Marginal Product (MP)

The additional output generated by adding one more unit of an input, keeping all other inputs constant.

Marginal Product of Labor Calculation

The additional output produced by adding one more worker; for example, if output rises from $50$ to $90$ cookies with a second worker, the marginal product is $40$ cookies.

Diminishing Marginal Product

The property whereby the additional output produced by each new unit of a variable input eventually decreases as more of that input is added to fixed amounts of other inputs.

Total Cost of Inputs

The sum of the fixed cost of the factory and the variable cost of workers ($\text{Total Cost} = \text{Fixed Cost} + \text{Variable Cost}$).

Fixed Costs (FC)

Expenses that do not change with the level of output and must be paid even if the business produces nothing, such as rent.

Variable Costs (VC)

Expenses that change as production increases or decreases, depending directly on the quantity of output produced.

Average Total Cost (ATC)

The average cost per unit of output, calculated using the formula: $\text{ATC} = \frac{\text{TC}}{Q}$

Marginal Cost (MC)

The additional cost incurred to produce one more unit of output, calculated as: $\text{MC} = \frac{\triangle\text{TC}}{\triangle Q}$

U-Shaped Average Total Cost

The shape of the ATC curve resulting from average fixed costs falling as output rises and average variable costs rising due to diminishing marginal product.

Efficient Scale

The quantity of output that results in the lowest average total cost for a firm.

Relationship between MC and ATC

When Marginal Cost is less than Average Total Cost, ATC is falling; when Marginal Cost is more than ATC, ATC is rising.

Technology and Cost Curves

Improvements in technology boost productivity, increasing marginal and average products and shifting cost curves like AVC, ATC, and MC downward.

Economies of Scale

Occurs when long-run average total cost decreases as a firm increases its output, often due to specialization or bulk buying.

Constant Returns to Scale

Occurs when long-run average total cost stays the same even as output increases.

Diseconomies of Scale

Occurs when long-run average total cost increases as a firm produces more, often due to coordination and communication problems in large firms.

LRATC Formula

$$\text{LRATC} = \frac{\text{Long Run Total Cost}}{Q}$$