Unit 7: Production & 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 firm’s total revenue minus its explicit and implicit costs
Normal Profit
The accounting profit earned when all resources earn their opportunity cost
Variable Resources
Any resource that can be varied in the short run to increase or decrease production Ex. Labor
Fixed Resources
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 - 3 months
Long Run
A period during which all resources under the firm’s control are variable - 1 year
Total Product
The total output produced by a firm
Production Function
Identifies the maximum quantities of a particular good or service that can be produced per time period with various combinations of resources, for a given level of technology
Marginal Product
The change in total product that occurs when the use of a particular resource increases by one unit, all other resources 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 a fixed 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
Average Variable Cost
Variable cost divided by output, VC/q
Average Total Cost
Total cost divided by output, TC/q, or average fixed cost and average variable cost , ATC=AFC+AVC
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
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 increases in the long run
Constant Long-Run Average Cost
A cost that occurs when, over some range of output, long run average cost neither increases nor decreases with changes in firm size
Production Function
Identifies the maximum qualities of a particular good or service that can be produced per time period with various combinations of resources, for a given level of technology
