Chapter 14: The Costs of Production

Flashcards covering key vocabulary, formulas, and concepts from Mankiw's Principles of Economics Chapter 14 regarding the costs of production.

Total revenue (TR)

The amount a firm receives for the sale of its output, calculated as $TR = P \times Q$.

Total cost (TC)

The market value of the inputs a firm uses in production, encompassing both explicit and implicit costs.

Profit

Total revenue minus total cost: $\text{Profit} = TR - TC$.

Explicit costs

Input costs that require an outlay of money by the firm, such as paying wages to workers.

Implicit costs

Input costs that do not require an outlay of money by the firm, such as the opportunity cost of the owner’s time.

Accounting profit

Total revenue minus total explicit costs.

Economic profit

Total revenue minus total costs, including both explicit and implicit costs.

Production function

The relationship between the quantity of inputs used to make a good and the quantity of output of that good.

Marginal product

The increase in output that arises from an additional unit of input, while holding other inputs constant.

Marginal product of labor (MPL)

The change in output resulting from an additional unit of labor, calculated as $MPL = \frac{\Delta Q}{\Delta L}$.

Diminishing marginal product

The property whereby the marginal product of an input declines as the quantity of the input increases.

Fixed costs (FC)

Costs that do not vary with the quantity of output produced and are incurred even if production is zero.

Variable costs (VC)

Costs that vary with the quantity of output produced.

Average fixed cost (AFC)

Fixed costs divided by the quantity of output: $AFC = \frac{FC}{Q}$.

Average variable cost (AVC)

Variable costs divided by the quantity of output: $AVC = \frac{VC}{Q}$.

Average total cost (ATC)

Total cost divided by the quantity of output, representing the cost of the typical unit produced: $ATC = \frac{TC}{Q}$.

Marginal cost (MC)

The increase in total cost that arises from an extra unit of production: $MC = \frac{\Delta TC}{\Delta Q}$.

Efficient scale

The quantity of output that minimizes average total cost.

Short run (SR)

A time period in which some inputs, such as factory size or land, are fixed.

Long run (LR)

A time period in which all inputs are variable, allowing firms to change factory size or other fixed resources.

Economies of scale

The property whereby long-run average total cost falls as the quantity of output increases, often due to increasing specialization.

Constant returns to scale

The property whereby long-run average total cost stays the same as the quantity of output changes.

Diseconomies of scale

The property whereby long-run average total cost rises as the quantity of output increases, often caused by coordination problems in large organizations.