Ag Econ Ch.6

Average cost

average cost is defined as cost incurred by the business in the current period divided by output or simply cost per unit of output.

input categories

consist of land, labor, capital, and management

shutdown

level of output at which average variable costs equal average revenue or the market price.

variable costs

level of specific current production costs that do vary with the level of output or input use. It is a short-run cost concept; all costs are considered variable in the long run. Variable costs are calculated by taking the price of the input multiplied by the quantity of the good or service used (i.e., hourly wage rate multiplied by the hours of hired labor employed by the business). Examples include current fuel bill, fertilizer bill, wages paid to hired labor, rental payment on farmland, and repair costs for machinery and motor vehicles

Production function

relationship between output and the factors of production (labor, capital, land, and management)

Stage 2 of production

represents the range of interest to economists. Why stop in stage I, and why produce in stage II?

Average total costs

the total costs incurred by the business in the current period per unit of output. Average total costs are calculated as ATC = TC , output or ATC = AFC + AVC. The average total cost curve, or ATC, associated with specific levels of output plays an important role in determining total profi

law of diminishing marginal returns

as successive units of a variable input are added to a production process with the other inputs held constant, the marginal physical product eventually decreases.

breakeven

level of output at which average total costs equal average revenue or market price

perfect competition

market structure characterized by a large number of producers selling a homogeneous product, each with perfect information, and no barriers to entry or exit

imperfect competition

market structure when one or more of the characteristics of perfect competition are not present.

fixed cost

specific form of current production costs that do not vary with the level of output or input use. This is a short-run cost concept; all costs are considered variable in the long run. Fixed costs are calculated by outside entities. Examples include the individual value of the business's current property tax bill, the insurance premium due this year, or the interest portion of the business's current mortgage payment.

total fixed costs

sum of all current production costs that do not vary with the level of output or input use. Total fixed costs are calculated by adding up all individual fixed costs. Total fixed costs can also be measured residually by subtracting total variable production costs from total costs. Examples include the total value of all fixed costs, or the business's current property tax bill, plus its current insurance premium due, plus the current mortgage interest payment due, and so on

total costs

sum of all individual categories of production costs during the current period. Total costs are calculated as TC = TVC + TFC. See examples for total fixed costs and total variable costs. Total costs are an important statistic used to calculate accounting profit.

total variable cost

sum of all individual categories of production costs that do vary with the level of output or input use. Total variable costs are calculated by adding up all individual variable costs. Total variable costs can also be measured residually by subtracting total fixed costs from total costs. Examples include the total value of all variable costs, or the current fuel bill, plus the fertilizer bill, plus wages paid to hired labor, plus the rental payment on farmland, and so on

total revenue

sum of all money received by the business from the sale of the products it markets during the current period. Total revenue is calculated as TR = (P corn * Q corn) + (P wheat * Q wheat) + ... or the sum of the cash receipts from marketings of the business's individual products. Examples include cash receipts from wheat marketed by a wheat farmer, cash receipts from flour marketed by a miller, cash receipts from bread marketed by a baker, and so on. Total revenue is another important statistic used to calculate accounting profit.

marginal physical product

the change in output or total product the business would achieve in the current period by expanding the use of an input by another unit. Marginal physical product is calculated as MPPlabor = Δ output , Δ labor, MPPcapital = Δ output , Δ capital, and so on. Examples include an increase in alfalfa production from the application of additional lime and the additional number of cases of fruit canned in the current period from the addition of another canning line.

marginal input costs

the change in the cost of a resource used in production as more of this resource is employed. Marginal input cost is set by the market for the resource. The marginal input cost for labor, for example, is equal to the wage rate the business faces in the hired labor market. The marginal input cost for fertilizer is the price of fertilizer in the marketplace.

Marginal revenue

the change in the revenue earned (from the production if the business is expanded). Marginal revenue is calculated as MR = Δ revenue , Δ output. Marginal revenue under conditions of perfect competition is identical to the price the business takes in the marketplace. This means that the additional revenue received from the marketplace will be unaltered by changes in the quantity the business produces; it is a price taker. For example, suppose the price of corn is $2.50 per bushel. This price will remain unchanged by the production decision of an individual producer

marginal value product

the change in the revenue earned by the business as it employs an additional unit of a resource, holding other resource use constant. Marginal value product is calculated as MVP = MPP * market price of product. The marginal value product of labor to a wheat producer, for example, is equal to the MPPlabor or change in wheat output resulting from the employment of an additional farm laborer, multiplied by the price of wheat. Stated another way, this represents the change in revenue the wheat producer would receive by hiring another laborer.

marginal cost

the change in total cost of production as the output or total product of the business is expanded. Marginal cost is calculated as MC = Δ cost 4 , Δ output. Marginal cost represents the total cost of producing another unit of output. Marginal cost to a wheat producer is the change in total costs of producing another acre of wheat. This is an important statistic because the profit-maximizing level of output for a business under conditions of perfect competition occurs at the point where the marginal cost of production is identical to the price of the product or marginal revenue. The portion of the business's marginal cost curve lying above AVC represents the firm's supply curve.

Average fixed cost

the fixed costs incurred by the business in the current period per unit of output. Average fixed costs are calculated as AFC = TFC , output or AFC = ATC - AVC. The average fixed cost curve, or AFC, associated with specific levels of output declines as output is expanded.

Average physical product

the level of output or total product produced by a business per unit of input used. Average physical product is calculated as follows: APPlabor = output , labor, APPcapital = output , capital, and so on. Examples include yield per acre, gain per pound of feed fed, and so on.

Average revenue

the level of revenue earned per unit of output. Average revenue is calculated as AR = revenue , output. Average revenue is also equal to the market price under the conditions of perfect competition. This suggests that the revenue the business receives per unit is identical no matter how much the business produces

total physical product curve

the total output of goods or services produced by the firm during the current period. The total product of a wheat farmer is the yield per acre multiplied by the number of acres harvested. Examples include total wheat produced by a wheat producer, total pounds of milk produced by a dairy farmer, and total number of cases canned by a canning factory

Average variable costs

the variable costs incurred by the business in the current period per unit of output. Average variable costs are calculated as AVC = TVC , output or AVC = ATC - AFC. The average variable cost curve, or AVC, associated with specific levels of output also plays an important role in assessing the economic performance of a business

profit

total revenue minus total expenses