Chapter 21: The Costs of Production

Explicit cost

A payment made for the use of a resource

Long run

A period of time long enough for all inputs to be varied (no fixed costs)

Production function

A technological relationship expressing the maximum quantity of a good attainable from different combinations of factor inputs

Variable costs

Costs of production that change when the rate of output is altered, such as labor and material costs

Fixed costs

Costs of production that don't change when rate of output is altered, such as the cost of basic plants and equipment

Profit

Difference between total revenue and total cost

Unit labor cost

Hourly wage rate divided by output per labor hour

Constant returns to scale

Increases in plant size do not affect minimum average cost: minimum per-unit costs are identical for small plants and large plants

Total cost

Market value of all resources used to produce a good or service

Efficiency (technical)

Maximum output of a good from the resources used in production

Productivity

Output per unit of input-for example, output per labor-hour

Economies of scale

Reductions in minimum average costs that come about through increases in the size (scale) of plant and equipment

Factors of production

Resource inputs used to produce goods and services, such as land, labor, capital, and entrepreneurship

Marginal physical product (MPP)

The change in total output associated with one additional unit of input

Marginal cost (MC)

The increase in total cost associated with a one-unit increase in production

Law of diminishing returns

The marginal physical product of a variable input declines as more of it is employed with a given quantity of other (fixed) inputs

Opportunity cost

The most desired goods or services that are forgone in order to obtain something else

Short run

The period in which the quantity (and quantity) of some inputs can't be changed

Economic cost

The value of all resources used to produce a good or service; opportunity cost

Implicit cost

The value of resources used, even when no direct payment is made

Average total cost (ATC)

Total cost divided by the quantity produced in a given time period

Average fixed cost (AFC)

Total fixed cost divided by the quantity produced in a given time period

Average variable cost (AVC)

Total variable cost divided by the quantity produced in a given time period