AP microeconomics

Production function

The relationship between the quantity of input a firm uses and the quantity of output it produces.

Fixed input

An input whose quantity is fixed for a period of time and cannot be varied.

Variable input

An input whose quantity can vary at any time.

Long Run

The time period in which all inputs can be varied.

Short Run

The time period in which at least one input is fixed.

Total product curve

Shows how the quantity of output depends on the quantity of the variable input for a given quantity of the fixed input.

Marginal product

The additional quantity of output that is produced by using one more unit of that input.

Marginal product of labor (MPL)

Change in quantity of output divided by change in quantity of labor; the output generated by one additional unit of labor.

Diminishing returns

Occurs when an increase in the quantity of an input leads to a decline in the marginal product of that input.

Fixed cost

A cost that does not depend on the quantity of output produced.

Variable cost

A cost that depends on the quantity of output produced.

Total cost

The sum of fixed cost and variable cost of producing a given quantity of output.

Marginal cost

Change in total cost divided by change in quantity of output; the cost generated by an additional unit of output.

Average total cost (ATC)

Total cost divided by quantity of output.

Average fixed cost (AFC)

Fixed cost divided by quantity of output.

Average variable cost (AVC)

Variable cost divided by quantity of output.

Spreading effect

The longer the output is, the greater the quantity over which fixed cost is spread, leading to lower average fixed cost.

Diminishing returns effect

The larger the output, the greater the amount of variable input required to produce additional units, leading to higher average variable cost.

Minimum-cost output

The quantity of output at which average total cost is lowest.

Sunk cost

A cost that has already been incurred and is non-recoverable.

Complements and substitutes

Substitute inputs can be used in place of each other; complements exist when one input increases the productivity of another.

Cost-minimizing input combinations

The combinations of inputs that cost the least when producing a given level of output.

Marginal product per dollar

The ratio of marginal product to the cost of hiring an additional unit of input.

Long Run Average Total Cost Curve

The long run average total cost curve typically behaves in a U-shape, decreasing at first due to economies of scale as production increases, then increasing due to diseconomies of scale as the firm grows beyond optimal size.This curve represents the lowest possible cost per unit of output when all inputs can be varied.