Production and Cost Flashcards

Vocabulary flashcards covering key terms related to production and cost, including profit measurement, short-run and long-run production, and cost concepts.

Accounting Profit

Total revenue minus accounting costs, including explicit costs and accounting depreciation.

Economic Profit

Total revenue minus opportunity cost, which includes both explicit and implicit costs.

Opportunity Cost

The sum of Explicit costs and Implicit costs, including normal profit and economic depreciation. It represents what a firm must give up to use a factor of production.

Normal Profit

The minimum level of profit a firm needs to cover all its costs, including the opportunity cost of resources, to remain in business. It is the cost of entrepreneurship.

Fixed Input

An input that does not change in quantity when output changes in the short run.

Variable Input

An input that changes in quantity when output changes.

Total Product (TP)

The total quantity of a good produced in a given period.

Marginal Product (MP)

The change in total product that results from a one-unit increase in the quantity of labor employed.

Average Product (AP)

The total product per worker employed; also known as labor productivity.

Law of Decreasing Marginal Returns

Occurs when the marginal product of an additional worker is less than the marginal product of the previous worker.

Total Fixed Cost (TFC)

Costs that do not vary as output varies and must be paid even if output is zero.

Total Variable Cost (TVC)

Costs that are zero when output is zero and vary as output varies.

Total Cost (TC)

The sum of TFC and TVC at each level of output. (TFC + TVC = TC)

Marginal Cost (MC)

The change in total cost that results from a one-unit increase in total product.

Average Total Cost (ATC)

Total cost per unit of output; equals Average fixed cost (AFC) + Average variable cost (AVC) (TC/Q = TFC/Q + TVC/Q)

Economies of Scale

Occurs when a firm’s output increases as average total cost decreases, often due to greater specialization of labor and capital.

Constant Returns to Scale

Exists when a firm’s output increases as average total cost remains constant, often achieved by replicating existing production facilities.

Diseconomies of Scale

Exists when a firm’s output increases as average total cost increases, often due to difficulties in coordinating and controlling a large enterprise.