The Cost of Production

Flashcards based on Chapter 7 - The Cost of Production, covering key concepts and terms related to costs in production.

Production technology

Measures the relationship between inputs and outputs.

Opportunity cost

The value to a firm of opportunities that are foregone; considered a cost.

Economic cost

Cost to a firm of utilizing economic resources in production, including opportunity costs.

Sunk cost

Expenditure that has been made and cannot be recovered.

Marginal cost (MC)

The cost of expanding output by one unit.

Average total cost (ATC)

Cost per unit of output, equivalent to average fixed cost (AFC) plus average variable cost (AVC).

Fixed cost

Cost that does not vary with the level of output.

Variable cost

Cost that varies as output varies.

Diminishing returns

A decrease in the marginal product of labor as more labor is hired.

User cost of capital

The annual cost of owning and using a capital asset, including economic depreciation and foregone interest.

Expansion path

Illustrates the least-cost combinations of labor and capital used to produce each level of output in the long run.

Economies of scale

Output can be doubled for less than a doubling of cost.

Diseconomies of scale

Doubling of output requires more than a doubling of cost.

Long-run average cost curve (LAC)

Represents the minimum cost for any level of output.

Short-run cost curves

Fixed in the short run, allowing firms to change inputs over the long run.