Production and Costs

Production Function

Relationship between inputs and outputs

Short Run

At least one resource is fixed.

Long Run

All inputs are variable.

Marginal Product (MP)

Additional output from one more input.

Law of Diminishing Returns

MP decreases as more of a variable input is added.

Fixed Cost (FC)

Costs that don’t vary with output (e.g., rent).

Variable Cost (VC)

Costs that vary with output (e.g., materials).

Total Cost (TC)

Fixed Cost + Variable Cost

Average Total Cost (ATC)

Total Cost ÷ Q

Marginal Cost (MC)

Change in TC from one more unit produced

Economies of Scale

ATC decreases as output increases (in long run)

Diseconomies of Scale

ATC increases as output increases.