Production and Costs Flashcards
Short-Run
A period of time in which at least one input to the production process is fixed.
Long-Run
A period of time in which all inputs to the production process are variable
Production in the short-run
In the short-run firms adjust their level of output by adjusting the quantity of labour that they employ.
Average Product (AP)
The average quantity of output produced by each unit of an input (eg. labour).
Marginal Product (MP)
The amount by which output increases (or decreases) as a result of employing one additional unit of an input (eg. labour).
Maximising Output
A function is maximised where its derivative is equal to zero.
Law of Diminishing Marginal Returns
The law of economics that states, as successive units of a variable resource (eg. labour) are added to a fixed input (eg. capital) beyond some point the marginal product of the variable input declines.
Opportunity Cost
The cost of a choice measured as the benefit forgone (opportunity lost) as a result of not pursuing the next best alternative.
Explicit Costs
Explicit payments made by the firm for hiring or purchasing the inputs to the production process.
Implicit Costs
The opportunity costs of the resources owned and used by the firm (or its owners) but not explicitly paid for by the firm.
Accounting Profit
Accounting Profit = Total Revenue – Explicit Costs
Economic Profit
Economic Profit = Total Revenue – (Explicit Costs + Implicit Costs)
Economies of Scale
The reduction in the average total cost of production that a firm obtains by expanding the scale of production.
Diseconomies of Scale
The increase in the average total cost of production that a firm incurs by expanding the scale of production.
