Microeconomics Chapter 7

Constant long-run average cost

A condition that occurs if, over some range of output, long-run average cost neither increases nor decreases with changes in firm size

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

Implicit costs

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

Total product

A firm's total 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

Long run

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

Short run

A period durning which at least one of a firm's resources is fixed

Zero economic profit/normal profit

Accounting profit earned when all resources earn their opportunity cost

Variable cost

Any production cost that changes as the rate of output changes

Fixed Cost

Any production cost that is independent of the firm's rate of output

Variable cost

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

Law of diminishing marginal returns

As more of a variable resource is added to a given amount of other resources, marginal product eventually declines and could become negative

True

At least one resource is fixed during a short run period.

Marginal function

Change in total product from an addition unit of resource

Diseconomies of scale

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

Economies of scale

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

True

If a firms's economic profit is positive, then it's accounting profit must also be positive.

False

If marginal output is negative, total product must be negative.

True

In the long run, all inputs are variable.

False

In the short run, all costs are fixed.

True

Labor is a variable resource

Normal profit

The accounting profit earned when all resources earn their opportunity cost; equal to implicit cost

Marginal Cost

The change in total cost resulting from a one-unit change in output; the change in total cost divided by the change in output, or MC=ΔTC/Δq

Marginal product

The change in total product that occurs when the use of a particular resource increases by one unit, all other resources are constant

Minimum efficient scale

The lowest rate of output at which a firm takes full advantage of economies of scale

Increasing marginal returns

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

Explicit cost

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

Production function

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

Total cost

The sum of fixed cost and variable cost, or TC=FC+VC

Producer's goal

To maximize profit

Average total cost

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

Average variable cost

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

True

When marginal product is negative, the slope of the total product curve must be negative.