Microeconomics Chapter 8: Production Technology and Cost - Key Vocabulary

A complete list of key vocabulary terms and definitions from Chapter 8 on production technology and cost.

Economic Profit

Total revenue minus economic cost.

Economic Cost

The opportunity cost of the inputs used in the production process; equal to explicit cost plus implicit cost.

Explicit Cost

A monetary payment.

Implicit Cost

An opportunity cost that does not involve a monetary payment.

Accounting Cost

The explicit costs of production.

Accounting Profit

Total revenue minus accounting cost.

Total-Product Curve

A curve showing the relationship between the quantity of labor and the quantity of output produced, ceteris paribus.

Marginal Product of Labor

The change in output from one additional unit of labor.

Diminishing Returns

As one input increases while the other inputs are held fixed, output increases at a decreasing rate.

Fixed Cost (FC)

Cost that does not vary with the quantity produced.

Variable Cost (VC)

Cost that varies with the quantity produced.

Short-Run Total Cost (TC)

The total cost of production when at least one input is fixed; equal to fixed cost plus variable cost, or $\text{TC} = \text{FC} + \text{VC}$.

Average Fixed Cost (AFC)

Fixed cost divided by the quantity produced, calculated as $\text{AFC} = \frac{\text{FC}}{Q}$.

Average Variable Cost (AVC)

Variable cost divided by the quantity produced, calculated as $\text{AVC} = \frac{\text{VC}}{Q}$.

Short-Run Average Total Cost (ATC)

Short-run total cost divided by the quantity produced; equal to AFC plus AVC, or $\text{ATC} = \text{AFC} + \text{AVC}$.

Short-Run Marginal Cost (MC)

The change in short-run total cost resulting from a one-unit increase in output, calculated as $\text{MC} = \frac{\Delta \text{TC}}{\Delta Q}$.

Long-Run Total Cost (LTC)

The total cost of production when a firm is perfectly flexible in choosing its inputs.

Long-Run Average Cost (LAC)

Long-run total cost divided by the quantity produced, calculated as $\text{LAC} = \frac{\text{LTC}}{Q}$.

Constant Returns to Scale

A situation in which the long-run total cost increases proportionately with output, so average cost is constant.

Long-Run Marginal Cost (LMC)

The change in long-run cost resulting from a one-unit increase in output, calculated as $\text{LMC} = \frac{\Delta \text{LTC}}{\Delta Q}$.

Indivisible Input

An input that cannot be scaled down to produce a smaller quantity of output.

Economies of Scale

A situation in which the long-run average cost of production decreases as output increases.

Minimum Efficient Scale

The output at which scale economies are exhausted.

Diseconomies of Scale

A situation in which the long-run average cost of production increases as output increases.