Chapter 9: Production

average total cost

total cost divided by the amount of output produced; total cost per unit

average total cost (ACT)

total cost divided by the amount of output produced; total cost per unit

average fixed cost (AFC)

total fixed cost divided by the amount of output produced; fixed cost per unit

economic profit (as measure)

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

accounting profit

total revenue minus the explicit costs of production

average variable cost

total variable cost divided by the amount of output produced; variable cost per unit

when deciding how much output it should produce to maximize its profits firms need two pieces of information....

1. the extra cost associated with producing an additional unit of output (marginal cost) 2. the extra benefit of producing that unit (marginal revenue)

___________ are a key tool that is used for determining whether a business is profitable or not and whether it should continue to produce or not in the short run

Average costs

increasing marginal returns

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

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

diseconomies 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

short-run average total cost curve

a curve showing the average total cost for different levels of output when at least on input of production is fixed, typically plant capacity

long-run average total cost curve

a curve showing the lowest average total cost possible for any given level of output when all inputs of production are variable

marginal values drive ...

average values

the plant size they should utilize depends on the amount of output _______ are willing and able to ______

consumers consume

fixed costs

costs that do not change with the amount of output produced

positive economic profit

encourages more firms to enter the market to produce goods and services

when production of a good or service increases, the average total cost of producing it will ________

increase

the average value _____ when the marginal value rises above it

increases

Marginal cost is to determine the level of output that a firm should produce in order to maximize profits

maximize profits

zero accounting profit

means that the value of economic profit is negative

economies of scale can result from a variety of factors ...

productivity gains from specialized labor lower costs of inputs as firms purchase larger quantities benefit from bulk pricing

the average value _______ when the marginal value is equal to it

stays unchanged

marginal cost

the additional cost associated with 1 more unit of an activity. For production , it is the change in total cost due to the production of 1 more unit of output

marginal product

the additional output produced as a result of utilizing 1 more unit of variable resource

average product

the average amount of output produced per unit of a resource employed; total product divided by the number of units of a resource employed

economic costs

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

minimum efficiency scale

the lowest level of output at which the long-run average total cost is minimized

implicit costs

the opportunity costs of using owned resources; costs for which no monetary payment is explicitly made

total cost

the sum of fixed and variable costs of production

long run

the time period in which all inputs of production can be changed

short run

the time period in which at least one input of production is fixed

total product

the total amount of output produced with a given amount of resources

the marginal cost curve has to _______ at the bottom of both the AVC and ATC curves

intersect

explicit costs (or asaccounting costs)

monetary payments made by individuals, firms, and governments for the use of land, labor, capital, and entrepreneurial ability owned by others

for an economy to function efficiently, resources need to go where they are ...

most valued and most productive

variable costs

costs that change with the amount of output produced, increasing as production increases and decreasing as production decreases

the average value _______ when the marginal call falls below it

decreases

when the marginal product increases the cost of marginal production ______

decreases (declines)

the average total variable cost is _________ when the marginal cost is equal to the average total cost of production

minimized

the average variable cost is _________ at the level of output at which the marginal cost is equal to the average cost

minimized