Econ Chapter 9: Economies of Scale and Scope
Labor Productivity
average product of labor for an entire industry or for the economy as a whole
Opportunity Cost
cost associated with opportunities forgone when a firm's resources are not put to their best alternative use Economic cost = Opportunity cost
Fixed Cost (FC)
cost that does not vary with the level of output and that can be eliminated only by shutting down
Variable cost (VC)
cost that varies as output varies
Economic Cost
cost to a firm of utilizing economic resources in production
Isoquants
curve showing all possible combinations of inputs that yield the same output
Marginal Rate of Technical Substitution
amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output remains constant MRTS= - change in capital input / change in labor input = -∆K/ ∆L (for a fixed q)
User Cost of Capital
Annual cost of owning and using a capital asset, equal to economic depreciation plus forgone interest. r=Depreciation rate+Interest rate
Rental Rate
Cost per year of renting one unit of capital.
Sunk costs
Costs that have been incurred and cannot be recovered
Long-run average cost curve (LAC)
Curve relating average cost of production to output when all inputs, including capital, are variable • LMC lies below the LAC when LAC is falling • LMC lies above the LAC when LAC is rising
Short-run average cost curve (SAC)
Curve relating average cost of production to output when level of capital is fixed
Long-run marginal cost curve (LMC)
Curve showing the change in long-run total cost as output is increased incrementally by 1 unit. • LMC lies below the LAC when LAC is falling • LMC lies above the LAC when LAC is rising
Accounting Cost
actual expenses plus depreciation charges for capital equipment
Average Total Cost (ATC)
firms total cost divided by its level of output. Used interchangeably with AC. TC/q
Average Fixed Cost (AFC)
fixed cost divided by the level of output FC/q
Isoquant Map
graph combining a number of isoquants, used to describe a production function
Learning Curve
graph relating amount of inputs needed by a firm to produce each unit of output to its cumulative output. As management and labor gain experience with production, the firm's marginal and average costs of producing a given level of output fall for four reasons 1. Workers adapt to the task 2. Managers become more efficient 3. Engineers gain experience 4. Suppliers process materials more effectively
Isocost Line
graph showing all possible combinations of labor and capital that can be purchased for a given total cost
Marginal Cost (MC)
increase in cost resulting from the production of one extra unit of output MC=∆VC∕∆𝑞= ∆TC∕∆q MC=w/MPL
Increasing Returns to Scale
output more than doubles when the quantities of all inputs are doubled
Returns to Scale
rate at which output increases as inputs are increased proportionately increasing returns to scale- output more than doubles when all inputs are doubled constant returns to scale- output doubles when all inputs are doubled decreasing returns to scale- output less than doubles when all inputs are doubled
Diseconomies of Scale
situation in which a doubling of output requires more than a doubling of cost. So big that average costs increase as more is produced
Economies of Scope
situation in which joint output of a single firm is greater than output that could be achieved by two different firms when each produces a single product
Diseconomies of Scope
situation in which joint output of a single firm is less than could be achieved by separate firms when each produces a single product
Economies of Scale
situation in which output can be doubled for less than a doubling of cost. Input proportions are variable. Measured in terms of cost-output elasticity Ec Ec=MC/AC Economies of Scale, Ec is less than 1 Long Run Average Costs decreases as more is produced.
Total cost (TC or C)
total economic cost of production, consisting of fixed and variable costs
Average Variable Cost (AVC)
variable cost divided by the level of output VC/q