Production and Cost in the Firm Flashcards
Explicit Cost
opportunity cost of resources employed by a firm that takes the form of cash payments.
implicit cost
a firm’s opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment
accounting profit
a firm’s total revenue minus its explicit costs
economic profit
a firms total revenue minus its explicit and implicit costs.
normal profit
the accounting profit earned when all resources earn their opportunity cost.
variable resource
any resource that can be varied in the short run to increase or decrease production
fixed resource
any resource that cannot be varied in the short run
short run
a period during which at least one of a firm’s resources is fixed
long run
a period during which all resources under the firm’s control are variable.
total product
a firm’s total output
production function
the relationship between the amount of resources employed and a firms total product
marginal production
the change in total product that occurs when the use of a particular resource increases by one unit, all other rescuers constant.
increasing marginal returns
the marginal product of a variable resource increases as each additional unit of that resource is employed.
law of diminishing marginal returns
as more of a variable resource is added to a given amount of another resource, marginal product eventually declines and could become negative.
fixed cost
any production cost that is independent of the firm’s rate of output.
variable cost
any production cost that changes as the rate of output changes.
total cost
the sum of fixed cost and variable cost or TC= FC+VC
marginal cost
the change in total cost resulting from a one-unit change in output; the change in total cost divided by the change in out put, or MC= ChangeTC/ Change q
average variable cost
Variable cost divided by output, or AVC= VC/q
average total cost
total cost divided by output, or ATC = TC/q; the sum of average fixed cost and average variable cost, or ATC= AFC+ AVC
economies of scale
forces that reduce a firm’s average cost as the scale of operation increases in the long run.
diseconomies of scale
forces that may eventually increase a firm’s average cost as the scale of operation increase in the long run.
long-run average cost curve
a curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies; also called the planning curve.
constant long-run average cost
a cost that occurs when, over some range of output, long-run average cost neither increases or decreases with changes in the firm size.
