Chapter 10: Cost of Production

Diminishing marginal returns

A characteristic of production whereby the marginal product of the next unit of a variable resource utilized is less than that of the previous variable resource

Economies of scale

A condition in which the long-run average total cost of production decreases as production increases

Diseconomics of scale

A condition in which the long-run average total cost of production increases as production increases

Constant returns to scale

A condition in which the long-run average total cost of production remains constant as production increases

Fixed costs

Costs that do not change with the amount of output produced

Explicit costs

Monetary payments made by individuals, firms, and governments, for the use of land, labor, capital, and entrepreneurial ability owned by others. Also known as accounting costs.

Average product (AP)

The average amount of output produced per unit of a resource employed; total product divided by the number of units of a resource employed. (TP)/units of resource

Economic costs

The costs associated with the use of resources; the sum of explicit and implicit costs

Average total cost (ATC)

Total cost (TC) divided by the amount of output produced, total cost per unit. (TC)/(Q) or ATC= AFC+AVC

Average fixed cost (AFC)

Total fixed cost (TFC) divided by the amount of output produced; fixed cost per unit. (TFC)/(Q)

Economic profit (as measure)

Total revenue minus economic costs, which include both explicit and implicit costs of production

Average variable cost (AVC)

Total variable cost (TVC) divided by the amount of output produced; variable cost per unit. (AVC)=(TVC)/(Q)

Accounting profit

total revenue - explicit costs

Implicit costs

The opportunity costs of using owned resources; costs for which no monetary payment is explicitly made. Ex. Opportunity costs of your time