Chapter 11

Variable Cost (334)

A cost that depends on the quantity of output produced. It is the cost of the variable input.

Fixed Cost (334)

A cost that does not depend on the quantity of output produced. It is the cost of the fixed input.

What happens when a producer accepts higher fixed cost?

A firm can lower its variable cost for any given output level.

Fixed Input (330)

An input whose quantity is fixed for a period of time and cannot be varied.

Variable Input (330)

An input whose quantity the firm can vary at any time.

Marginal Cost Curve

Due to gains from specialization, the marginal cost curve may slope downward initially before sloping upward, giving it a "swoosh" shape.

U-Shaped Average Total Cost Curve (340)

Falls at low levels of output, then rises at higher levels. Economists believe these are typical because average total cost consists of two parts: average fixed costs and average variable cost.

What happens to marginal cost when output increases? Why?

It normally increases due to diminishing returns.

The accounting table shows a car manufacturer's total cost of producing cars (See Notebook). What is this manufacturer's fixed cost? For each level of output, calculate this manufacturer's marginal cost (MC).

MC, the additional cost per additional car produced. Notice that MC is below ATC for levels of output less than the minimum-cost output and above ATC for levels of output greater than the minimum-cost output. See Notebook.

The accounting table shows a car manufacturer's total cost of producing cars (See Notebook). What is this manufacturer's fixed cost? On one diagram, draw the manufacturer's AVC, ATC, and MC curves.

See Notebook.

Total Product Curve (330)

Shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input.

Total Cost Curve (335)

Shows how total cost depends on the quantity of output.

Long-Run Average Total Cost Curve (347)

Shows the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output. A firm moves along its short-run average total cost curve as it changes the quantity of output, and it returns to point on both its short-run and long-run average total cost curves once it has adjusted fixed cost to its new output level.

Marginal Cost

Te cost of one more unit produced.

Marginal Product of an Input (331)

The additional quantity of output that is produced by using one more unit of that input.

Average Fixed Cost (340)

The fixed cost per unit of output. Falls when output increases (the spreading effect).

The accounting table shows a car manufacturer's total cost of producing cars (See Notebook). What is this manufacturer's fixed cost?

The manufacturer's fixed cost is $500,000. Even when no output is produced, the manufacturer has a cost of $500,000.

Minimum-Cost Output (342)

The quantity of output at which average total cost is lowest- the bottom of the U-shaped average total cost curve. Also the point at which the marginal cost curve crosses the average total cost curve from below.

Production Function (330)

The relationship between the quantity of inputs a firml uses and the quantity of output it produces.

Total Cost of Producing a Given Quantity of Output (334)

The sum of the fixed cost and the variable cost of producing that quantity of output.

Long Run (330)

The time period in which all inputs can be varied.

Short Run (330)

The time period in which at least one input is fixed.

Average Variable Cost (340)

The variable cost per unit of output. Rises with output (the diminishing returns effect).

Average Total Cost (Average Cost) (339)

Total cost divided by quantity of output produced. The cost of average unit of output.

The accounting table shows a car manufacturer's total cost of producing cars (See Notebook). For each level of output, calculate the variable cost (VC). For each level of output except zero output, calculate the average variable cost (AVC), average total cost (ATC), and average fixed cost (AFC). What is the minimum-cost output?

VC, calculated as TC − FC; AVC, calculated as VC/Q; ATC, calculated as TC/Q; and AFC, calculated as FC/Q. The minimum-cost output is 8 cars, the level at which ATC is minimized. See Notebook.

Diminishing Returns to an Input (332)

When an increase in the quantity of that input, holding levels of all other inputs fixed, leads to a decline in the marginal product of that input.

Increasing Returns to Scale (348)

When long-run average total cost declines as output increases.

Decreasing Returns to Scale (348)

When long-run average total cost increases as output increases.

Constant Returns to Scale (349)

When long-run average total cost is constant as output increases. Scale effects depend on the technology of production.