Intro To Microeconomics: Chapter 7

Front 1

Profit

Back 1

Total revenue minus total cost

Front 2

Business firm

Back 2

An organization owned and operated by private individuals, that specializes in production

Front 3

Production

Back 3

The process of combining inputs to make goods and services

Front 4

Technology

Back 4

The method to turn inputs into outputs (produce goods or services)

Front 5

Long run

Back 5

A time horizon long enough for a firm to vary all of its inputs

Front 6

Variable inputs

Back 6

An input whose usage can change as the level of output changes
(inputs that can vary)

Front 7

Fixed input

Back 7

An input whose quantity must remain constant, regardless of how much output is produced
(inputs that remain fixed)

Front 8

Short run

Back 8

A time horizon during which at least one of the firm's inputs cannot be varied

Front 9

Total product

Back 9

The maximum quantity of output that can be produced from a given combination of inputs

Front 10

Marginal product of labor(MPL)

Back 10

The additional output produced when one more worker is hired
-MPL= Change in (Q)/ change in (L)

Q=quantity
L=labor

Front 11

Increasing marginal returns to labor

Back 11

The marginal product of labor increases as more labor is hired
(output increases more dramatically each time)

Front 12

Diminishing marginal returns to labor

Back 12

The marginal product of labor decreases as more labor is hired
(output continues to increase but less dramatic each time)

Front 13

Law of diminishing (marginal) returns

Back 13

As more and more of any input is added to a fixed amount of other inputs, its marginal product will eventually decline

Front 14

Sunk cost

Back 14

A cost that has been paid or must be paid, regardless of any future action being considered

- Sunk costs should not be considered when making decisions

Front 15

Explicit costs

Back 15

Involving actual payments

ex. Rent paid out, Interest on loans, managers' salaries, cost of raw materials

Front 16

Implicit costs

Back 16

No money changes hands but still a loss

ex. opportunity cost of: rent foregone, investment income foregone

Front 17

Fixed costs

Back 17

Costs of fixed inputs, which remain constant as output changes

Front 18

Variable costs

Back 18

Costs of variable inputs, which changes with output

Front 19

Total fixed cost(TFC)

Back 19

The cost of all inputs that are fixed in the short run

Front 20

Total variable cost(TVC)

Back 20

The cost of all variable inputs used in producing a particular level of output

Front 21

Total cost(TC)

Back 21

The costs of all inputs--fixed and variable

Front 22

Average fixed cost(AFC)

Back 22

Total fixed cost divided by the quantity of output produced:

AFC = TFC/Q

Front 23

Average variable cost(AVC)

Back 23

Total variable cost divided by the quantity of output produced

AVC = TVC/Q

Front 24

Average total cost(ATC)

Back 24

Total cost divided by the quantity of output produced

ATC = TC/Q

Front 25

Marginal cost(MC)

Back 25

The increase in total cost from producing one more unit of output

MC = (change in TC)/(change in Q)

Front 26

Shape of the marginal cost curve

Back 26

MC curve is U-shaped

- Marginal product of labor(MPL) rise, marginal cost(MC) falls
- MPL falls, MC rises
- MC fall then rises(Because MPL rises then falls)

Front 27

Relationships between average and marginal costs

Back 27

the U-shape of the AVC curve results from the U-shape of the MC curve

the U-shape of the ATC curve results form the behavior of both AVC and AFC. Low levels of output=AVC and AFC falling, so ATC curve slopes downward. Higher levels of output=rising AVC overcomes falling AFC, and ATC curve slopes upward

The MC curve crosses both the AVC curve and the ATC curve at their respective minimum points(where it changes to an upward slope)

Front 28

Cost in the long run

Back 28

There are no fixed inputs or fixed costs; all inputs and all costs are variable

Front 29

Production in the long run

Back 29

A firm will choose the combination method with the lowest cost

Front 30

Long-run total cost(LRTC)

Back 30

The cost of producing each quantity of output when the least-cost input combination is chosen

Front 31

Long-run average total cost

Back 31

The cost per unit of producing each quantity of output in the long run, when all inputs are variable

LRATC = LRTC/Q

It tells us the cost per unit when the firm can vary all of its inputs and always choose the cheapest input mix possible

Front 32

Long-run total cost range

Back 32

can be less than or equal to , but not greater than, the short-run total cost (LRTC < or = TC)

Front 33

Long run average cost range

Back 33

Can be less than or equal to, but not greater than, the short-run average total cost
(LRATC < or = ATC)

Front 34

Plant

Back 34

the collection of fixed inputs in the short run at the firm's disposal

Front 35

ATC and LRATC relationship

Back 35

in the short run, a firm can only move along it's current ATC curve. In the long run, it can move from ATC curve to another by varying the size of its plant. As it does so, it will also be moving along its LRATC curve

Front 36

The shape of LRATC

Back 36

- If long-run TC rises proportionately less than output, LRATC slopes downward(economies of scale)
- If cost rises proportionately more than output, LRATC slopes upward(diseconomies of scale)
- Between those 2 regions, cost and output rise proportionately,, yielding constant returns to scale

(LRATC is U- shaped. y-axis: cost. x-axis: output
left = economies of scale
right = diseconomies of scale
middle = constant returns to scale)

Front 37

Economies of scale

Back 37

Long-run average total cost decreases as output increases

Front 38

Lumpy input

Back 38

An input whose quantity cannot be increased gradually, but must instead be adjusted in large jumps.

Front 39

Diseconomies of scale

Back 39

Long-run average total cost increases as output increases (higher output levels)

Front 40

Constant returns to scale

Back 40

long-run average total cost is unchanged as output increases

Front 41

Isoquant

Back 41

Curve (Q) that show different input combination that can produce the same quantity of output

Front 42

Isoquant shape

Back 42

Always slopes downwards. An increase in one input requires a decrease in the other input to keep total production unchanged.

(Left half of a U)

Front 43

Marginal rate of technical substitution(MRTS)

Back 43

The rate at which a firm can substitute one input for another while keeping output constant