Unit 8: Product and Cost in the Short Run

Question 1

production

Answer 1

The creation of goods and services from inputs or resources.

Question 2

production function

Answer 2

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.

Question 3

production function (equation)

Answer 3

Q = f(L,K), long run production function
L=amounts of labor
K=amount of capital

Question 4

variable proportions production

Answer 4

Production in which a given level of output can be produced with more than one combination of inputs.

Question 5

fixed proportions production

Answer 5

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)

Question 6

technical efficiency

Answer 6

Producing the maximum output for any given combination of inputs and existing technology.

Question 7

economic efficiency

Answer 7

Producing a given level of output at the lowest-possible total cost.

Question 8

relationship between technical and economic efficeincy

Answer 8

when a firm is economically efficient it must be technically efficient, but not the other way around

Question 9

variable input

Answer 9

Input for which the level of usage may be varied to increase or decrease output.

Question 10

variable costs

Answer 10

payments for variable inputs

Question 11

fixed input

Answer 11

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

Question 12

fixed costs

Answer 12

payments for fixed inputs

Question 13

quasi-fixed input

Answer 13

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.

Question 14

short tun

Answer 14

A time period of production during which at least one input is a fixed input.

Question 15

long run

Answer 15

Time period far enough in the future to allow all fixed inputs to become variable inputs.

Question 16

planning horizon

Answer 16

Set of all possible short-run situations the firm can face in the future.

Question 17

sunk cost

Answer 17

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.

Question 18

avoidable cost

Answer 18

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

Question 19

average product of labor (AP)

Answer 19

Total product (output) divided by the number of workers (AP = Q/L).

Question 20

marginal product of labor (MP)

Answer 20

The additional output attributable to using one additional worker with the use of all other inputs fixed (MP = ΔQ/ΔL).

Question 21

law of diminishing marginal product

Answer 21

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.

Question 22

total fixed cost (TFC)

Answer 22

The total amount paid for fixed inputs. Total fixed cost does not vary with output.

Question 23

total variable cost (TVC)

Answer 23

The amount paid for variable inputs. Total variable cost increases with increases in output.

Question 24

total cost (TC)

Answer 24

The sum of total fixed cost and total variable cost. Total cost increases with increases in output (TC = TFC + TVC ).

Question 25

average fixed cost (AFC)

Answer 25

Total fixed cost divided by output (AFC = TFC/Q).

Question 26

average variable cost (AVC)

Answer 26

Total variable cost divided by output (AVC = TVC/Q).

Question 27

average total cost (ATC)

Answer 27

Total cost divided by output or the sum of average fixed cost plus average variable cost (ATC = TC/Q = AVC + AFC).

Question 28

short-run marginal cost (SMC)

Answer 28

The change in either total variable cost or total cost per unit change in output (ΔTVC/ΔQ = ΔTC/ΔQ).

Question 29

link between product curves and cost curves in the short run

Answer 29

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

Question 30

when average product is increasing (decreasing)…

Answer 30

marginal product is greater (less) than average product