Production and Costs Flashcards
Total Product
Total product (TP) is the total output produced with a given amount of factor inputs.
Marginal Product
Marginal product (MP) is the additional output resulting from employing one more unit of labour. Marginal product is calculated by dividing the change in total output by the change in the quantity of labour.
Average Product
Average product (AP) is output per unit of labour. Average product is calculated by dividing total output by the quantity of labour.
Short Run
The short run is the time period during which at least one of the factor inputs used in the production process is fixed. It does not correspond to any specific number of weeks, months or years as it varies from firm to firm and from industry to industry. For example, a web hosting firm may take only a few weeks or even days to increase its capacity by purchasing more servers. However, an oil refining firm may take many years to increase its capacity due to the long time period needed to build oil refineries.
Long Run
The long run is the time period after which all the factor I puts used in the production processes are variable. In the long run, if a firm wants to increase output, not only can it employ more labour, it can also employ more capital whose quantity is fixed in the short run. The long run does not correspond to a specific number of weeks, months or years as it too varies from industry to industry, much like the short run.
Fixed Cost
Fixed costs are costs that do not vary with the output level. In other words, an increase in the output level will not lead to an increase in fixed costs. Fixed costs will be incurred even if the firm shuts down production. Examples of fixed costs include interest payments on loans for the purchase of capital goods, insurance premiums and rent
Total Cost
Total cost (TC) is the cost of the factor inputs needed to produce an amount of output. In the short run, total cost is the sum of total fixed cost (TFC) and total variable cost (TVC) and is positively related to the output level.
Marginal Cost
Marginal cost (MC) is the additional cost resulting from producing one more unit of output. Marginal cost is calculated by dividing the change in total cost by the change in total output.
The Law of Diminishing Marginal Returns/The Law of Variable Proportions
The law of diminishing marginal returns states that if an increasing quantity of a variable factor input is used with a given quantity of fixed factor inputs, a point will be reached beyond which each additional unit of the variable factor input will add less to total output than the previous additional unit.
Economies of Scale
Economies of scale (EOS) refer to the decrease in average cost when the scale of production expands. EOS is shown by a downward movement along the long-run average cost curve. When a firm expands the scale of production, average cost will usually fall.
