Microeconomics Chapter 7
Constant long-run average cost
A condition that occurs if, 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 planning curve
Implicit costs
A firm's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment
Total product
A firm's total output
Economic profit
A firm's total revenue minus its explicit and implicit costs
Accounting profit
A firm's total revenue minus its explicit costs
Long run
A period during which all resources under the firm's control are variable
Short run
A period durning which at least one of a firm's resources is fixed
Zero economic profit/normal profit
Accounting profit earned when all resources earn their opportunity cost
Variable cost
Any production cost that changes as the rate of output changes
Fixed Cost
Any production cost that is independent of the firm's rate of output
Variable cost
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 other resources, marginal product eventually declines and could become negative
True
At least one resource is fixed during a short run period.
Marginal function
Change in total product from an addition unit of resource
Diseconomies of scale
Forces that may eventually increase a firm's 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 operation increases in the long run
True
If a firms's economic profit is positive, then it's accounting profit must also be positive.
False
If marginal output is negative, total product must be negative.
True
In the long run, all inputs are variable.
False
In the short run, all costs are fixed.
True
Labor is a variable resource
Normal profit
The accounting profit earned when all resources earn their opportunity cost; equal to implicit cost
Marginal Cost
The change in total cost resulting from a one-unit change in output; the change in total cost divided by the change in output, or MC=ΔTC/Δq
Marginal product
The change in total product that occurs when the use of a particular resource increases by one unit, all other resources are constant
Minimum efficient scale
The lowest rate of output at which a firm takes full advantage of economies of scale
Increasing marginal returns
The marginal product of a variable resource increases as each additional unit of that resource is employed
Explicit cost
The opportunity cost of resources employed by a firm that takes the form of cash payments
Production function
The relationship between the amount of resources employed and a firm's total product
Total cost
The sum of fixed cost and variable cost, or TC=FC+VC
Producer's goal
To maximize profit
Average total cost
Total cost divided by output, or ATC=TC/q; the sum of average fixed cost and average variable cos, or ATC=AFC/AVC
Average variable cost
Variable cost divided by output, or AVC=VC/q
True
When marginal product is negative, the slope of the total product curve must be negative.
