Chapter 6-7 Pindyck Flashcards
Practical way of describing how inputs can be transformed into outputs
Productive technology
Firms must take into account the priecs of labor, capital, and other inputs
Cost constraints
Firms must choose how much of each input to use in producing its output
Input choices
Explanation of how a firm makes cost-minimizing production decisions and how its cost varies with its output.
Theory of the firm
Inputs into the production
process
Factors of production
Function showing the highest
output that a firm can produce
for every specified combination
of inputs.
Production function / q = F(K, L)
Period of time in which quantities of one or more production factors cannot be
changed.
Short run
Production factor that cannot be varied.
Fixed input
Amount of time needed to make all production inputs variable.
Long run
Output per unit of a particular input.
Average product
Additioal ouptut produced as an input is increased by one unit
Marginal product
Principle that as the use of an input increases with other inputs fixed, the
resulting additions to output will eventually decrease.
Law of diminishing marginal returns
Average
product of labor for an entire
industry or for the economy as
a whole
labor productivity
Total
amount of capital available for
use in production
Stock of capital
Development of new
technologies allowing factors
of production to be used more
effectively
technological change
Curve showing all
possible combinations of inputs
that yield the same output
isoquant
Actual expenses plus depreciation
charges for capital equipment.
accounting cost
Cost to a firm of utilizing economic
resources in production.
economic cost
Cost
associated with opportunities
forgone when a firm’s resources
are not put to their best
alternative use
opportunity cost
Expenditure that
has been made and cannot be
recovered.
sunk cost
A cost that does not vary with the level of output and that can
be eliminated only by going out of business.
Fixed cost
A cost that varies as output varies.
variable cost
Total
economic cost of production,
consisting of fixed and variable
costs.
total cost
Policy of
treating a one-time expenditure
as an annual cost spread out
over some number of years.
amortization
Increase
in cost resulting from the
production of one extra unit of
output.
marginal cost
Firm’s total cost divided
by its level of output.
average total cost (atc)
Fixed cost divided by
the level of output.
average fixed cost (afc)
Variable cost divided by
the level of output.
average variable cost (avc)
Annual
cost of owning and using a
capital asset, equal to economic
depreciation plus forgone
interest.
user cots of capital
formula of user cost of capital
user cost of capital= economic depreciation + (intereste rate) (value of capital) OR r= interest rate +depreciation rate
Cost per year of
renting one unit of capita
rental rate
Graph showing
all possible combinations of
labor and capital that can be
purchased for a given total cost.
isocost line
Curve
passing through points of
tangency between a firm’s
isocost lines and its isoquants.
extension path
Curve relating average
cost of production to output
when all inputs, including capital,
are variable.
long-run average cost curve (lac)
Curve relating average
cost of production to output
when level of capital is fixed.
short-run average cost curve (sac)
Curve showing
the change in long-run total
cost as output is increased
incrementally by 1 unit.
long-run marginal cost curve (lmc)
Situation in which output can be
doubled for less than a doubling
of cos
economies of scale
Situation in which a doubling
of output requires more than a
doubling of cost.
diseconomies of scale
Curve showing the
various combinations of two
different outputs (products) that
can be produced with a given
set of inputs.
product transformation curve
Situation in which joint output
of a single firm is greater than
output that could be achieved
by two different firms when each
produces a single product
economies of scope
Situation in which joint output of
a single firm is less than could be
achieved by separate firms when
each produces a single product
diseconomies of scope
Percentage of cost
savings resulting when two or
more products are produced
jointly rather than individually
degree od economies of scope (sc)
Graph
relating amount of inputs
needed by a firm to produce
each unit of output to its
cumulative output
learning curve
Function
relating cost of production
to level of output and other
variables that the firm can
control.
cost function
