AP Micro Unit 3 Vocab

Production Function

The way a firm or producers combine inputs to get an output

Types of Input

Variable Input and Fixed Input

Variable Input

Inputs that can be changed in the short run to change production (School: Electricity, teacher)

Fixed Inputs

Inputs that can’t be changed in the short-run to change production (School: Classrooms)

Short Run

The period of time during which there are fixed inputs; the period of time too short for a firm to alter its plant capacity

Plant Capacity

A firm’s max potential level of output

Long Run

The period of tie long enough for a firm to change all its inputs; the period of time long enough for a firm to alter its plant capacity

Diminishing Marginal Returns

When an increase in the quantity of that input, holding the quantity of all other inputs fixed, decreases the input’s marginal product

Cost Minimization

(Marginal Product of Labor)MPL/PL(Price of Labor)= (Marginal Product of Capital)MPK/PK(Price of Capital)

Total Product

The total quantity output produced by a certain amount of inputs

Marginial Product

The additional output produced by 1 more unit of a variable input, often labor

MPL = change in TP/ change in L

Average Product

Average quantity of output produced by 1 unit of a variable input, often labor

APL = TP/L

MP’s relation to TP

• MP is the slope of TP

• MP increases = TP increases at an increasing rate

• MP decreases = TP increases at a decreasing rate

• MP = 0 == TP is max

• MP is negative = TP is decreasing

MP relation to AP

• MP passes through the max of AP

• MP is above AP = AP is rising

• MP is below AP = AP is falling

Fixed Cost

Costs that do not change with the level of output produced even at 0 (rent or salaries)

Variable Cost

Changes as quantity output changes

Total Cost

TC = VC + FC

Marginal Cost

Additional cost of producing one more unit of output

MC = change in TC / change in QT

Average Fixed Cost

AFC = FC/QT produced

Average Variable Cost

AVC = VC/QT produced

Average Total Cost

ATC = TC/QT

ATC = AFC + AVC