Economics Chapter 3: Production and Costs

Costs that do not change with the level of output produced by a firm. These costs remain constant, regardless of how much or little the firm produces.

Costs that vary directly with the level of output. They increase as production increases and decrease as production decreases.

The total of all costs incurred by a firm to produce a given level of output. It is the sum of total fixed costs and total variable costs.

The cost per unit of output produced. It is calculated by dividing the total cost by the quantity produced.

The total variable cost per unit of output. Calculated by dividing the total variable cost by the quantity produced.

The extra output gained from employing one additional unit of labor, keeping all other inputs constant.

The total output divided by the total number of labor units used.

The relationship between the quantity of labor employed and the amount of output produced, assuming all other inputs are fixed.

The sum of the marginal products of all previously employed units of labor.

The point at which employing additional units of labor results in decreasing marginal product.

The change in total product (TP) divided by the change in labor (L).

The average product of labor at any point is the total product at that point divided by the total number of laborers used to produce that output.

The average and marginal returns are the same.

The change in total cost when output increases by one unit. It reveals the cost of producing one extra unit of output.

The total variable cost at a given level of output is the sum of marginal costs up to that level of output.

For a given level of output, the average of all marginal costs up to that level is equal to the average variable cost.

The increase in total variable cost resulting from producing one additional unit of output.

In the short run, fixed costs remain constant, so the change in total cost solely arises from the variation in total variable cost.

The change in total cost when output increases from 4 to 5 units.

The change in output when increasing production from 4 to 5 units.

The ratio of change in total cost to change in output when output increases from 4 to 5 units.

The ratio of total fixed cost (TFC) to the quantity of output (q). It represents the average fixed cost per unit of output.

A curve that shows the relationship between average fixed cost (AFC) and the quantity of output (q). It is a rectangular hyperbola, meaning that as output increases, AFC decreases, but never reaches zero.

The total fixed cost (TFC) is calculated as the product of AFC and the quantity of output (q). This is shown visually as the area of a rectangle formed by AFC and the quantity on a graph.

The total fixed cost curve is a horizontal line that intersects the vertical axis at the level of TFC. The slope of the line at any point represents the AFC at that level of output.

The cost of producing one additional unit of output when output is very close to zero. This is the initial cost of starting production.

The change in total cost (TC) divided by the change in output (q) when output is significantly higher than zero. This represents the additional cost of adding one more unit when production is already underway.

The marginal cost curve (SMC) shows the relationship between marginal cost (MC) and the quantity of output (q). It usually has a U-shape, reflecting the changes in cost as output increases.

Total cost (TC) is the sum of all costs incurred by a firm to produce a given level of output. It includes both fixed costs and variable costs.

Long run cost curves show the relationship between the level of output and the cost of production when all inputs are variable. The firm can adjust all factors of production in the long run.

Long run average cost (LRAC) is the cost per unit of output, calculated by dividing total cost (TC) by the quantity of output (q). LRAC = TC/q.

Long run marginal cost (LRMC) is the change in total cost (TC) per unit of change in output. LRMC is the extra cost of producing one more unit of output in the long run.

Increasing returns to scale (IRS) means that if all inputs are increased proportionally, the output increases by a greater proportion.

When there are increasing returns to scale (IRS), the long-run average cost curve (LRAC) is downward sloping. The firm can produce each additional unit of output at a lower average cost.

The minimum point on the long run average cost (LRAC) curve represents the most efficient scale of production for the firm. This is the minimum point where the LRAC is lowest.

The shape of the long run average cost curve (LRAC) depends on the returns to scale (IRS, CRS, DRS). The LRAC curve can be downward sloping (IRS), constant (CRS), or upward sloping (DRS).