Chapter 11 (Terms) Technology, Production, and Costs

Variable Costs

Costs that change as output changes. (number of cups needed to sell lemonade)

Fixed Costs

Costs that remain constant as output changes. (the cost of the lemonade stand)

Average Fixed Cost

Fixed cost divided by the quantity of output. (U shaped) AFC = FC/Q Minimum where the marginal cost curve intersects

Spreading the Overhead

Overhead refers to fixed costs. When the average fixed cost gets smaller and smaller as output increases because in calculating average fixed cost, we are dividing something that gets larger and larger—output—into something that remains constant—fixed costs.

Technological Change

A change in the ability of a firm to produce a given level of output with a given quantity of inputs.

Explicit Cost

A cost that involves spending money. Also called accounting costs.

Long-Run Average Cost Curve

A curve that shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, where no inputs are fixed.

Implicit Cost

A non-monetary cost. (forgone salary of not working a full-time job)

Marginal Product of Labor

The additional output a firm produces as a result of hiring one more worker. (marginal product decreases each time, eventually there will be too many workers for the number of pizza ovens and the process will become extremely inefficient). Calculated by determining how much total input increases with each additional worker hired. Causes output to... Adding more units of labor to the production process causes output to increase at a decreasing rate. Causes marginal product to... Adding more units of labor to the production process causes marginal product to rise initially, but then decreases at a decreasing rate.

Marginal Cost

The change in a firm's total cost from producing one more unit of a good or service MC = change in total cost/change in quantity

Total Cost

The cost of all the inputs a firm uses in production. TC = FC + VC

Depreciation

The difference between the amount paid for capital at the beginning of the year, and the amount it could be sold for at the end of the year.

Opportunity Cost

The highest-valued alternative that must be given up in order to engage in an activity.

Minimum Efficient Scale

The level of output at which all economies of scale are exhausted.

Long Run

The period of time during which all of the firm's inputs are varied, change its technology and change the size of its plants. All variables are non-fixed in the long run.

Short Run

The period of time during which at least one of the firm's input is fixed

Law of Diminishing Returns

The principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline. (graph: increases rapidly but then begins to decline) (applies only in the short run, do not confuse with diseconomies of scale)

Technology

The processes a firm uses to turn input in output of goods and services

Production Function

The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs. (the costs of making pizzas in relation to the number of pizzas than can be made)

Constant Returns to Scale

The situation in which a firm's long-run average costs remain unchanged as it increases output.

Diseconomies of Scale

The situation in which a firm's long-run average costs rise as the firm increases output. (explains why the long-run average cost curve slopes upwards).

Economies of Scale

The situation when a firm's long-run average costs fall as it increases the quantity of output it produces.

Average Product of Labor

The total output produced by a firm divided by the quantity of laborers (sum of the number of pizzas made by each worker/number of workers) = number of pizzas made by each worker

Average Total Cost

Total cost divided by the quantity of output produced (total costs/number of pizzas made) = cost of each pizza (Average total costs = U shaped = decreases, levels off, then increases again) ATC = AVC + AFC

Average Variable Cost

Variable costs divided by the quantity of output produced. (U shaped) AVC = VC/Q Minimum where the marginal cost curve intersects

Relationship between Marginal Cost and Average Cost

When marginal product of labor is rising, marginal cost of output is falling. When marginal product of labor is falling, the marginal cost of production is rising. We can conclude that the marginal cost of production falls and then rises—forming a U shape—because the marginal product of labor rises and then falls. Marginal cost equals average total cost at the minimum of average total cost. Marginal cost always ends up intersecting the average cost curve and increasing faster than it.