Chapter 11

Variable costs

Costs that change as output changes. All costs are variable in the long run.

Explicit costs

Costs that involve spending money

Fixed Costs

Costs that remain constant as output changes. Do not exist in the long run

Technological Change

If a firm changes its ability to produce a given level of output with a given quantity of inputs

Economies of scale

Long-run average costs falling as output increases

Long Run

No inputs are fixed because firms have time to adopt new technology and change its size. All costs are variable and there are no diminishing returns. Must be long enough to allow all inputs to be altered

Diseconomies of scale

Situation in which a firm might get so large that their long-run average costs rise as the firm increases output

Average fixed cost and variable cost

fixed cost / quantity of output variable cost / quantity of output

Long Run average cost curve

shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed

Implicit costs

A non-monetary opportunity cost. Finding these involves identifying the resources used in the firm that could have been used for another beneficial purpose.

Short Run

A period of time during which at least one of a firm's inputs are fixed

Law of Diminishing Returns

Adding more of a variable input to the same amount of a fixed input will cause the marginal product of the variable input to decline

Marginal Product of Labor

The additional output a firm produces as a result of hiring one more worker

Marginal Cost

The change in a firm's cost from producing one more unit of a good or service. DELTA Total Cost / DELTA Quantity

Minimum Efficient Scale

The lowest level of output at which all economies of scale are exhausted

Constant returns to scale

The point at which growing larger does not allow more economies of scale. Long-run average costs remains unchanged as it increases output

Technology

The processes firms use to turn inputs into outputs of goods and services

Production Function

The relationship between the inputs employed and the maximum output of the firm

Average Total Cost

Total Cost / Output Average Fixed Cost + Average Variable Cost

Total Cost Equation

Total Cost = Fixed Cost + Variable Cost

Average Product of Labor

Total Output / Quantity of Workers. = Marginal Product of Labor