Unit 8: Product and Cost in the Short Run Flashcards
production
The creation of goods and services from inputs or resources.
production function
A schedule (or table or mathematical equation) showing the maximum amount of output that can be produced from any specified set of inputs, given the existing technology.
production function (equation)
Q = f(L,K), long run production function
L=amounts of labor
K=amount of capital
variable proportions production
Production in which a given level of output can be produced with more than one combination of inputs.
fixed proportions production
Production in which one, and only one, ratio of inputs can be used to produce a good. (usage of all outputs must be expanded to affect output)
technical efficiency
Producing the maximum output for any given combination of inputs and existing technology.
economic efficiency
Producing a given level of output at the lowest-possible total cost.
relationship between technical and economic efficeincy
when a firm is economically efficient it must be technically efficient, but not the other way around
variable input
Input for which the level of usage may be varied to increase or decrease output.
variable costs
payments for variable inputs
fixed input
An input for which the level of usage remains constant as output varies. Once payment is made for a fixed input, it cannot later be recovered if the firm decides to discontinue using the fixed input
fixed costs
payments for fixed inputs
quasi-fixed input
A lumpy or indivisible input for which a fixed amount must be used for any positive level of output, and none is purchased when output is zero.
short tun
A time period of production during which at least one input is a fixed input.
long run
Time period far enough in the future to allow all fixed inputs to become variable inputs.
planning horizon
Set of all possible short-run situations the firm can face in the future.
sunk cost
Payment for an input that, once made, cannot later be recovered should the firm no longer need to use the input. Fixed costs are sunk costs.
avoidable cost
Payment for an input that can be recovered should the firm no longer wish to use that input. Variable costs and quasi fixed costs are avoidable costs
average product of labor (AP)
Total product (output) divided by the number of workers (AP = Q/L).
marginal product of labor (MP)
The additional output attributable to using one additional worker with the use of all other inputs fixed (MP = ΔQ/ΔL).
law of diminishing marginal product
The principle that as the number of units of the variable input increases, other inputs held constant, a point will be reached beyond which the marginal product decreases.
total fixed cost (TFC)
The total amount paid for fixed inputs. Total fixed cost does not vary with output.
total variable cost (TVC)
The amount paid for variable inputs. Total variable cost increases with increases in output.
total cost (TC)
The sum of total fixed cost and total variable cost. Total cost increases with increases in output (TC = TFC + TVC ).
average fixed cost (AFC)
Total fixed cost divided by output (AFC = TFC/Q).
average variable cost (AVC)
Total variable cost divided by output (AVC = TVC/Q).
average total cost (ATC)
Total cost divided by output or the sum of average fixed cost plus average variable cost (ATC = TC/Q = AVC + AFC).
short-run marginal cost (SMC)
The change in either total variable cost or total cost per unit change in output (ΔTVC/ΔQ = ΔTC/ΔQ).
link between product curves and cost curves in the short run
AVC = w/AP and SMC = w/MP w = price of the variable input
When MP (AP) ^ then SMC (AVC) decreasing When MP = AP at APs max, SMC = AVC at AVCs min
when average product is increasing (decreasing)…
marginal product is greater (less) than average product