ECON102 Ch. 15 Production Costs

Inputs

Resources that go into production

Outputs

Goods and services that result from production

Marginal Analysis

Analysis based on incremental changes

Profit Max Rule

Produce when MC>MC. Stop producing when MB=MC

Variable costs

Production costs that can be adjusted quickly

Fixed (Sunk) costs

production costs that cannot be quickly adjusted. Must be paid even if no production occurs.

Accounting Costs

Monetary Costs, Depreciation

Economic Costs

Total cost of production, including accounting costs and opportunity costs

Opportunity Costs

value of the next best alternative foregone when a choice is made

Private Costs

costs accruing to the economic actors directly involved in an activity.

External Costs

costs accruing to others who are not involved in activity

Production Function

equation or graph representing a mathematical relationship between types and quantities of inputs and the quantity of output

Equation: Production Function

Output = f(inputs)

Fixed Inputs

production input that is fixed in quantity, regardless of production level

variable input

production input whose quantity can be changed relatively quickly, resulting in changes in the level of production

Short-Run (prodn process)

period where at least one input is fixed, regardless of level of production

Limiting Factor

period in which all production inputs can be varied in quantity

Long-Run (prodn process)

period in which all production inputs can be varied in quantity

total product curve

curve showing the total amount of output produced with different levels of one variable input, holding all other inputs constant

Marginal Product (return)

addtl quantity of output produced by increasing the level of a variable input by one, holding all other inputs constant.

Diminishing Marginal Returns

each successive unit of a variable input produces smaller marginal product. It is when the slope` line in the graph gets flatter.

Constant Marginal Returns

situation in which each successive unit of a variable input produces increasing marginal product.

increasing marginal returns

situation in which each successive unit of a variable input produces larger marginal product. The line slopes upwards on the graph at the end to reflect the increase.

Total Cost Curve

graph showing relationship between TC and output level

Equation: Total Costs

FC + VC

Marginal Cost

Cost of producing last unit of output.

Diminishing marginal returns leads to

Increasing marginal costs

Increasing marginal costs

cost of producing one additional unit of output rises as more output is produced. Decreased MR = Increased MC.

constant marginal costs

situation in which the cost of producing one addtl unit of output stays the same as more output is produced. Constant MC = Constant MR

decreasing marginal costs

situation in which cost of producing one addtl unit of output falls as more output is produced. Increased MR = Decreased MC

Long Run Average Cost LRAC

cost of production per unit of output when all inputs can be varied in quantity

Average Cost

cost per unit of Q - AC=TC/Q

Economies of Scale

situations in which the long-run avg cost of production falls as the size of the enterprise increases. Decreasing downward line in a graph.

constant returns to scale

situations in which the long run average cost of production stays the same size of the enterprise increases. Constant line in the graph.

diseconomies to scale

long run avg cost of production rises as the size of the enterprise increases; typically some point where a business is too big, too complex to manage effectively. Increasing upward sloping line in the graph.

Minimum efficient scale

smallest size an enterprise can be and still benefit from long run avg costs

maximum efficient scale

largest size an enterprise can be and still benefit from long run avg costs

input substitution

using more of one input and less than another in response to change in availability and costs to produce the same good or service