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
Summary 2
A firm may initially experience increased marginal returns as it takes advantage of increased specialization of the variable resource. But the law of diminishing marginal returns indicates that the firm eventually reaches a point where adding more units of the variable resource yields a decreasing marginal product.
implicit cost
A firm's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment
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 of the firm's rate of output
variable resouce
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
Summary
Explicit costs are opportunity costs of resources employed by a firm that take the form of cash payments. Implicit costs are the opportunity costs of using resources owned by the firm. A firm earns a normal profit when total revenue covers all implicit and explicit costs. Economic profit equals total revenue minus both explicit and implicit costs.
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
Summary 4
In the long run, all inputs under the firm's control are variable, so there is no fixed cost. The firm's long-run average cost curve, also called its planning curve, is an envelope formed by a series of short-run average total cost curves. The long run is best thought of as a planning horizon.
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 = DTC/Dq
marginal product
The change in total product that occurs when the use of a particular resource increases by one unit, all other resources constant
Summary 3
The law of diminishing marginal returns from the variable resource is the most important feature of production in the short run and explains why marginal cost and average cost eventually increase as output expands.
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
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
average total cost
Total cost divided by output, or ATC 5 TC/q; the sum of average fixed cost and average variable cost, or ATC = AFC + AVC
Average variable cost
Variable cost divided by output, or AVC = VC/q
Summary 1
Variable resources can be varied quickly to increase or decrease output. In the short run, at least one resource is fixed. In the long run, all resources are variable.
economic profit
economic profit A firm's total revenue minus its explicit and implicit costs
explicit cost
explicit cost Opportunity cost of resources employed by a firm that takes the form of cash payments
total product
firms total output
accounting profit
total revenue minus explicit cost