Chapter 7

fixed cost

a cost that does not change, no matter how much of a good is produced

variable cost

a cost that rises or falls depending on the quantity produced

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

isoquant curve

a curve that shows all the technology efficient combinations of two resources, such as labor and capital, that produce a certain rate of output

economic profit

a firm's total revenue minus its explicit and implicit costs

accounting profit

a firm's total revenue minus its explicit costs

Explicit Cost

opportunity cost of resources employed by a firm that takes the form of cash payments

marginal rate of technical subsitution

the rate at which labor substitutes for capital without affecting output

production function

the relationship between the amount of resources employed and a firm's total product

total cost

the sum of fixed and variable costs. TC = FC + VC

total product

the total output produced by a firm

average total cost

total cost divided by output, or ATC = TC/q; the sum of average fixed cost and average variable cost, or ATC = AFC + AVC

average variable cost

variable cost divided by output, or AVC = VC/q

properties of isoquants

1. isoquants farther from the origin represent greater output rates 2. isoquants have negative slopes because along a given isoquant, the quantity of labor employed inversely relates to the quantity of capital employed 3. isoquants do not intersect because each isoquant refers to a specific rate of output 4. isoquants are usually convex to the origin

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

implicit cost

A firm's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment.

long run

A period during which all resources under the firm's control are variable

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.

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

fixed resource

any resource that cannot be varied in the short run

Dis-economics of scale

forces that may eventually increase a firm's average cost as the scale of operation increases in the long run

economics of scale

forces that reduce a firm's average cost as the scale of operations increases in the long run

isocost line

identifies all combinations of capital and labor the firm can hire for a given total cost

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.

Expansion Path

the line formed by connecting tangency points

increasing marginal returns

the marginal product of a variable resource increases as each additional unit of that resource is employed

short run

the period of time during which at least one of a firm's inputs is fixed (short run is under 3 months)