Economics Flashcards

Flashcards for Lecture 4

Law of Diminishing Returns

The point when each extra unit of the variable factor will produce less extra output than the previous unit.

Total Physical Product (TPP)

The total output or quantity of output produced by a firm.

Average Physical Product (APP)

The total physical product divided by the quantity of the variable input (TPP/QV).

Marginal Physical Product (MPP)

The change in total physical product resulting from a change in the quantity of the variable input (ΔTPP/ΔQV).

Fixed Factors of Production

Inputs that cannot be easily changed in the short run.

Variable Factors of Production

Inputs that can be easily adjusted in the short run.

Explicit Costs

Direct, out-of-pocket payments for resources used in production.

Implicit Costs

The opportunity cost of using resources already owned by the firm.

Fixed Costs

Costs that do not vary with the level of output in the short run.

Sunk Costs

Costs that cannot be recovered once they have been incurred.

Variable Costs

Costs that change with the level of output.

Total Fixed Cost (TFC)

The total cost of all fixed inputs.

Total Variable Cost (TVC)

The total cost of all variable inputs.

Total Cost (TC)

The sum of total fixed cost and total variable cost (TFC + TVC).

Marginal Cost (MC)

The change in total cost resulting from producing one more unit of output.

Average Fixed Cost (AFC)

Total fixed cost divided by the quantity of output (TFC/Q).

Average Variable Cost (AVC)

Total variable cost divided by the quantity of output (TVC/Q).

Average Total Cost (ATC)

Total cost divided by the quantity of output (TC/Q).

Increasing Returns to Scale

When output increases by a larger proportion than the increase in inputs.

Constant Returns to Scale

When output increases by the same proportion as the increase in inputs.

Decreasing Returns to Scale

When output increases by a smaller proportion than the increase in inputs.

Economies of Scale

Factors that cause average costs to fall as output increases.

Diseconomies of Scale

Factors that cause average costs to rise as output increases.

Total Revenue (TR)

The total amount of money a firm receives from selling its product.

Average Revenue (AR)

Total revenue divided by the quantity sold (TR/Q); also equal to the price per unit.

Marginal Revenue (MR)

The change in total revenue resulting from selling one more unit of output.

Isoquant

A curve showing all possible combinations of inputs that yield the same level of output.

Isocost

A line showing all possible combinations of inputs that can be purchased for a given total cost.

Long Run Average Cost (LRAC)

The average cost of production when all inputs are variable.

Long Run Marginal Cost (LRMC)

The change in long-run total cost resulting from producing one more unit of output.

Break even point:

P = ATC, where the price equals the average total cost, indicating the level of production at which a firm earns zero economic profit.