Chapter 11: Behind the Supply Curve: Inputs, Production Functions, and Cost Structures

Comprehensive vocabulary flashcards based on Chapter 11: Behind the Supply Curve: Inputs and Costs, covering inputs, production functions, marginal and average product, cost types, cost curves, and returns to scale.

Production Function

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

Variable Input

An input whose quantity the firm can vary at any time.

Fixed Input

An input whose quantity is fixed for a period of time (i.e., in the short run).

Short Run

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

Long Run

The period of time in which all inputs can be varied.

Total Product Curve

A graphical representation that shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input.

Marginal Product of an Input

The additional output produced by using one more unit of that input, holding the levels of all other inputs fixed. For labour: $MPL = \frac{\Delta q}{\Delta L}$.

Diminishing Returns to an Input

The phenomenon where an increase in the quantity of an input (holding all other inputs fixed) leads to a decline in the marginal product of that input.

Average Product of Labour (APL)

The total quantity of output produced per unit of labour employed, calculated as: $APL = \frac{q}{L}$.

Fixed Cost (FC)

A cost that does not depend on the quantity of output produced; it is the cost of the fixed input.

Variable Cost (VC)

A cost that depends on the quantity of output produced; it is the cost of the variable input.

Total Cost (TC)

The sum of fixed cost and variable cost for producing a given quantity of output: $TC = FC + VC$.

Total Cost Curve

A curve that shows how total cost depends on the quantity of output produced.

Marginal Cost (MC)

The change in total cost generated by producing one additional unit of output: $MC = \frac{\Delta TC}{\Delta q}$.

Average Total Cost (ATC)

Total cost divided by the quantity of output produced: $ATC = \frac{TC}{q}$, also referred to simply as average cost.

Average Fixed Cost (AFC)

The fixed cost per unit of output: $AFC = \frac{FC}{q}$.

Average Variable Cost (AVC)

The variable cost per unit of output: $AVC = \frac{VC}{q}$.

Spreading Effect

The cost effect wherein a larger output spreads total fixed cost over more units, causing average fixed cost ($AFC$) to fall as output increases.

Diminishing Returns Effect

The cost effect wherein a larger output requires larger amounts of variable inputs to produce each additional unit, causing average variable cost ($AVC$) to rise as output increases.

Minimum-Cost Output

The quantity of output at which average total cost is lowest, corresponding to the bottom of the U-shaped $ATC$ curve where $MC = ATC$.

Long-Run Average Total Cost Curve (LRATC)

A curve showing the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output.

Increasing Returns to Scale (Economies of Scale)

A condition in which long-run average total cost declines as output increases.

Decreasing Returns to Scale (Diseconomies of Scale)

A condition in which long-run average total cost increases as output increases.

Constant Returns to Scale

A condition in which long-run average total cost remains constant as output increases.

Duality between Productivity and Cost

The inverse relationship between productivity measures and cost measures, shown by $MC = w \times \frac{1}{MPL}$ and $AVC = w \times \frac{1}{APL}$, where costs fall as productivity rises and vice versa.