Econ Ch 6
stage 3 of production
begins at the point where the marginal physical product reaches zero. Increasing the use of the input beyond this point is no longer rational since the marginal physical product is negative.
Stage I of Production
begins at zero input use and continues to the level of input use where the marginal physical product is equal to the average physical product. The average physical product will have reached its peak at the end of stage I.
input categories
consist of land, labor, capital, and management.
shutdown
level of output at which average variable costs equal marginal cost.
production function
relationship between output and the factors of production (labor, capital, land, and management).
Stage 2 of production
represents the range of interest to economists. Why stop in stage I where the APP is rising, and why produce in stage III where the MPP is negative?
fixed costs
specific form of current production costs that do not vary with the level of output or input use.
average fixed costs
Average fixed costs incurred by a business AFC = TFC ÷ output OR AFC = ATC − AVC
total costs
Sum of all individual categories of production costs during the current period. Total costs are calculated as TC = TVC + TFC. Total costs are an important statistic used to calculate accounting profit.
Average Cost
Total cost/output
law of diminishing marginal return
as successive units of a variable input are added to a production process with the other inputs held constant, the marginal physical product eventually decreases.
breakeven
level of output at which average total costs equal average revenue.
perfect competition
market structure characterized by a large number of producers selling a homogeneous product, each with perfect information, and no barriers to entry or exit.
imperfect competition
market structure when one or more of the characteristics of perfect competition are not present.
total fixed cost
sum of all current production costs that do not vary with the level of output or input use. Total fixed costs are calculated by adding up all individual fixed costs. Total fixed costs can also be measured residually by subtracting total variable production costs from total costs.
total variable cost
sum of all individual categories of production costs that do vary with the level of output or input use. Total variable costs are calculated by adding up all individual variable costs. Total variable costs can also be measured residually by subtracting total fixed costs from total costs.
total revenue
sum of all money received by the business from the sale of the products it markets during the current period.
marginal physical product
the change in output or total product the business would achieve in the current period by expanding the use of an input by another unit. Marginal physical product is calculated as MPPlabor = Δ output ÷ Δ labor, MPPcapital = Δ output ÷ Δ capital, and so on
marginal input cost
the change in the cost of a resource used in production as more of this resource is employed.
marginal revenue
the change in the revenue earned (from the production if the business is expanded). Marginal revenue is calculated as MR = Δ revenue ÷ Δ output. Marginal revenue under conditions of perfect competition is identical to the price the business takes in the marketplace
marginal value product
the change in the revenue earned by the business as it employs an additional unit of a resource, holding other resource use constant. Marginal value product is calculated as MVP = MPP × market price of product.
marginal cost
the change in total cost of production as the output or total product of the business is expanded. Marginal cost is calculated as MC = Δ cost ÷ Δ output. profit-maximizing level of output for a business under occurs at the point where the marginal cost of production is identical to the price of the product or marginal revenue. The portion of the business's marginal cost curve lying above AVC represents the firm's supply curve.
average physical product
the level of output or total product produced by a business per unit of input used. Average physical product is calculated as follows: APPlabor = output ÷ labor, APPcapital = output ÷ capital, and so on.
average revenue
the level of revenue earned per unit of output. Average revenue is calculated as AR = revenue ÷ output. Average revenue is also equal to the market price under the conditions of perfect competition. This suggests that the revenue the business receives per unit is identical no matter how much the business produces.
Average total costs
the total costs incurred by the business in the current period per unit of output. Average total costs are calculated as ATC = TC ÷ output or ATC = AFC + AVC. The average total cost curve, or ATC, associated with specific levels of output plays an important role in determining total profit. Figure 6-4 showed that the difference between average revenue (which is the same as marginal revenue) or AR and ATC at OMAX represents the average profit or profit per unit at this level of output. This difference (AR − ATC) multiplied by the level of output OMAX represents the level of total profit. The minimum point on the ATC curve, where the MC curve intersects this curve from below, represents the break-even level of output
total physical product curve
the total output of goods or services produced by the firm during the current period.
average variable costs
the variable costs incurred by the business in the current period per unit of output. Average variable costs are calculated as AVC = TVC ÷ output or AVC = ATC − AFC. The average variable cost curve, or AVC, associated with specific levels of output also plays an important role in assessing the economic performance of a business. Figure 6-3 B shows that the minimum point on the AVC, where the MC curve intersects this curve from below, occurs at OSD. This level of cost per unit of output corresponds to the lowest the business can afford to see the market price (and AR) fall and continue to operate in the short run.
profit
total revenue minus total expenses.
