Unit 3 - Production, Cost, and the Perfect Competition Model Guide

Constant returns to scale

Constant returns to scale

output increase directly in proportion to an increase in all inputs (ex.

Fixed cost

cost that doesn’t change with amount of output produced

Long run

time period in which all inputs can be variable.

Rental rate

price of capital.

Production function

relation between the quantity of inputs a firm uses and the quantity of output it produces.

Capital

goods that are used to produce goods /services.

Marginal product

change in overall output when input changes.

Diminishing marginal returns

as input increases, the output of each input will be less than the previous input.

Profit

is the excess revenue that a business gets to keep.

Production function

relation between the quantity of inputs a firm uses and the quantity of output it produces

Fixed input

an input whose quantity doesnt change

Variable input

an input whose quantity can change

Long run

time period in which all inputs can be variable

Short run

time period in which at least 1 input is fixed

Marginal product

change in overall output when input changes

Diminishing marginal returns

as input increases, the output of each input will be less than the previous input

Output

quantity produced

Rental rate

price of capital

Capital

goods that are used to produce goods/services

Fixed cost

cost that doesnt change with amount of output produced (ex

Variable cost

cost that changes with amount of output produced

Marginal cost

cost difference of one additional unit of output (∆TC/∆Q)

Long run average total cost (LRATC)

same as short run ATC, but bigger

Economies of scale

LRATC declines as output increases

Diseconomies of scale

LRATC increaess as output increases

Constant returns to scale

output increase directly in proportion to an increase in all inputs (ex

Implicit cost

not an actual cost, a cost that you couldve been earning (ex

Marginal Revenue

additional revenue gained by producing one more unit

Exit rule

if P < ATC, exit the market

Shut down rule

a firm should not produce unless it can cover its variable costs