Production and Costs

production

a transformation of resources or inputs into goods and services

fixed input

input whose quantity cannot be changed as outputs

variable input

input whose quantity can be changed as output changes

short run

if any of the firm’s inputs are fixed, it’s said to be producing in the

long run

if none of the inputs are fixed, the firm is producing in the

marginal physical product

the change in output that results in changing the variable input by one unit, holding all other inputs fixed

law of diminishing marginal returns

as ever larger amounts of a variable input are combined with fixed inputs, eventually the marginal physical product of the variable input will decline

fixed cost

the cost that does not vary with output

variable cost

cost that varies with output

total cost

sum of fixed costs and variable costs

TC = TFC + TVC

formula for total cost

marginal cost

change in total cost that results from a change in output

average marginal rule

applies to AVC and ATC in relation to MC

sunk cost

cost incurred in the past that cannot be changed by current decisions and therefore cannot be recovered