Chapter 7 Econ

Average Total Cost

Total cost divided by output, or ATC=TC/q or ATC=AFC+AVC

Average Variable Cost

Variable cost divided by output or AVC=VC/q

Implicit Cost

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

Accounting Profit

a firm's total revenue minus its explicit cost

Explicit Cost

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

Diseconomies of Scale

Forces that may eventually increase a firms 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 operations increases in the long run

Isocost Line

Identifies all combinations of capital and labor the firm can hire for a given total cost

Properties of Isoquants

1) Isoquants further from the origin represent greater output rates 2) Isoquants have negative slopes because along a given isoquant, the quantity of labor employed inversely relates tot he quantity of capital employed 3) Isoquants do not intersect because each isoquant refers to a specific rate of output 4) Isoquants are usually convex to the origin

Constant Long Run Average Cost

A cost that occurs when, 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 panning curve

Isoquant Curve

A curve that shows all the technological efficient combinations of two resources, such as labor and capital

Economic profit

A firm's total revenue minus its explicit and implicit costs

Long Run

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

Short Run

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

Variable Cost

Any production cost that changes as the rate of output changes

Fixed Cost

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

Variable Resources

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 a fixed resource, marginal product eventually declines and could become negative

Normal Profit

The accounting profit earned when all resources earn their opportunity cost

Marginal Product

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

Expansion Path

The line formed by connecting tangency points

Increasing Marginal Returns

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

Marginal Rate of Technical Substitution

The rate at which labor substitutes for capital without affecting output

Production Function

The relationship between the amount of resources employed and a firm's total product// Identifies the maximum quantities of a particular good or service that can be produced per time period with various combinations of resources, for a given level of technology

Total Cost

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

Total product

The total output produced by a firm