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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