C718 Module 8 Cost of Production

Diminishing Marginal Returns

Decreasing satisfaction or usefulness as additional units of a product are acquired

Marginal cost

Marginal cost (MC) is the amount by which total cost rises with an additional unit of output. It is the ratio of the change in total cost to the change in the quantity of output. Extra cost of producing one additional unit of production

Economic Loss

Total costs exceed total revenue

Short Run

a planning period over which the managers of a firm must consider one or more of their factors of production as fixed in quantity

Explicit Costs

are out-of-pocket costs or payments made to factors of production such as labor and capital

Negative Marginal Returns

at this stage workers get in each others way and disrupt production, so overall output decreases

Accounting Profit

is a cash concept. It is total revenue minus explicit costs--the difference between dollars brought in and dollars paid out.

Average variable cost

it is total variable cost divided by quantity. (TVC/Q)

Constant returns to scale occur when

long-run average cost stays the same over an output range. (horizontal sloping LRAC curve)

Economies of scale occur when

long-run average total costs fall as output increases (downward sloping LRAC curve)

Diseconomies of scale occur when

long-run average total costs rise as output increases (Upward sloping LRAC curve)

Law of Diminishing Marginal Returns

principle that as the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease. the marginal product of any variable factor of production will eventually decline, assuming the quantities of other factors of production are unchanged.

Implicit Costs

represent opportunity costs of using resources already owned by the firm. (depreciation of goods, materials, and equipment that are necessary for a company to operate)

Average Product

the average amount produced by each unit of a variable factor of production

Marginal Product of Labor

the change in output from hiring one additional unit of labor

Marginal Product

the increase in output that arises from an additional unit of input

Long Run

the planning period over which a firm can consider all factors of production as variable

Increasing Marginal Returns

the range over which each additional unit of a variable factor adds more to total output than the previous unit.

Average Product of Labor

the total output produced by a firm divided by the quantity of workers

Average total cost (ATC)

total costs divided by quantity of output (TC/Q)

Average fixed cost

total fixed cost divided by quantity, (TFC/Q)

Economic Profit

total revenue minus total cost, including both explicit and implicit costs, where cost is measured in the economic sense as opportunity cost