Chapter 8

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expansion path

a line formed by connecting the points of tangency between isocost lines and the highest respective attainable isoquants

isocost line

a line that identifies all the combinations of capital and labor that can be purchased at a given total cost

minimum efficient scale

the scale of operations at which average cost per unit reaches a minimum

total cost (TO)

the sum of total fixed and total variable cost at each output level

average fixed cost (AFC)

total fixed cost divided by the amount of output

average variable cost (AVC)

total variable cost divided by the amount of output

golden rule of cost minimization

a rule that says that to minimize cost, the firm should employ inputs in such a way that the marginal product per dollar spent is equal across all inputs

economies of scale

a situation in which a firm can increase its output more than proportionally to its total input cost

diseconomies of scale

a situation in which a firm's output increases less than proportionally to its total input cost

learning by doing

improvements in productivity resulting from a firm's cumulative output experience

marginal cost (ME)

the change in total cost that results from a one unit change in output

total variable cost (TVC)

the cost incurred by the firm that depends on how much output it produces

total fixed cost (TFC)

the cost incurred by the firm that does not depend on how much output it produces

input substitution effect

the effect of a change in the price of an input on a firm's relative use of the input to produce a given level of output


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