Costs and Supply Key terms

Question 1

An input (or factor of production)

Answer 1

is a good or service used to produce output

Question 2

technically efficient

Answer 2

A production technique is technically efficient if there is no other way to make a given output using less of one input and no more of the other inputs.

Question 3

The production function

Answer 3

is the set of all technically efficient techniques.

Question 4

A technique

Answer 4

is a particular way to combine inputs to make output

Question 5

Technology

Answer 5

is the list of all known techniques. Technical progress is a new technique allowing a given output to be made with fewer inputs than before.

Question 6

The long run

Answer 6

is the period long enough for the firm to adjust all its inputs to a change in conditions

Question 7

the short run

Answer 7

In the short run the firm can make only partial adjustment of its inputs to a change in conditions.

Question 8

Long-run total cost

Answer 8

is the minimum cost of producing each output level when the firm can adjust all inputs.

Question 9

Long-run marginal cost.

Answer 9

is the rise in long-run total cost if output rises permanently by one unit.

Question 10

Economies of scale (or increasing returns to scale)

Answer 10

mean long-run average cost falls as output rises

Question 11

Diseconomies of scale (or decreasing returns to scale)

Answer 11

mean long-run average cost rises as output rises

Question 12

Constant returns to scale

Answer 12

mean long-run average costs are constant as output rises.

Question 13

Minimum efficient scale (MES)

Answer 13

is the lowest output at which the LAC curve reaches its minimum

Question 14

Globalization

Answer 14

is the increasing integration of national markets that were previously much more segmented from one another.

Question 15

A fixed factor of production

Answer 15

is an input that cannot be varied. A variable factor can be varied, even in the short run.

Question 16

Fixed vs variable costs

Answer 16

Fixed costs do not vary with output.

Variable costs change as output changes.

Question 17

marginal product

Answer 17

The marginal product of a variable factor is the extra output from an extra unit of that input, holding constant all other inputs.

Question 18

the law of diminishing returns

Answer 18

Holding all factors constant except one, the law of diminishing returns says that, beyond some level of the variable input, further increases in the variable input lead to a steadily decreasing marginal product of that input.

Question 19

Short-run marginal cost

Answer 19

is the extra cost of making an extra unit of output in the short run while some inputs remain fixed.

Question 20

Short-run average fixed cost (SAFC)

Answer 20

equals short-run fixed cost (SFC) divided by output

Question 21

Short-run average variable cost (SAVC)

Answer 21

equals SVC divided by output

Question 22

short-run average total cost (SATC)

Answer 22

equals STC divided by output.

Question 23

short-run output decision

Answer 23

The firm’s short-run output decision is to supply Q1, the output at which MR = SMC, if the price covers short-run average variable cost SAVC1 at that output. If not, the firm supplies zero.