AP Economics Chapter 20: The Costs of Production - Custom Scholars
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AP Economics Chapter 20: The Costs of Production

question
Economic/Opportunity Cost
answer
Value/Worth the resource would have in its best alternative use.
question
Explicit Costs
answer
Money payments for the use of resources owned by others.
question
Implicit Costs
answer
Money payments that self-employed resources could have earned in their best alternative use.
question
Normal Profit
answer
Minimum profit that a firm must receive in order to stay in business.
question
Economic Profit
answer
Total revenue less economic costs (both explicit and implicit).
question
Short Run
answer
Period of time too brief for a firm to alter its plant size.
question
Long Run
answer
Period of time long enough for a firm to adjust quantities of all resource that it employs as well as its plant size.
question
Total Product (TP)
answer
Total quantity/output of a produced good/service.
question
Marginal Product (MP)
answer
Extra output/product associated with adding an additional unit of variable resource (labor).
question
Average Product (AP)
answer
Output per unit of labor input (AP=TP/Units of Labor).
question
Law of Diminishing Returns
answer
As successive units of a variable resource are added to a fixed resource, MP attributed to each additional unit of the variable resource will decline.
question
Fixed Costs
answer
Costs that do not vary with changes in output.
question
Variable Costs
answer
Costs that change with levels of output.
question
Total Cost
answer
Sum of fixed costs and variable costs at each level of output (TC=TFC+TVC).
question
Average Fixed Cost (AFC)
answer
Total fixed cost divided by quantity of output (AFC=TFC/Q).
question
Average Variable Cost (AVC)
answer
Total variable cost divided by quantity of output (AVC=TVC/Q).
question
Average Total Cost (ATC)
answer
Total cost divided by quantity of output or the sum of average fixed cost and average variable cost (ATC=TC/Q=AFC+AVC).
question
Marginal Cost (MC)
answer
Extra/additional cost of producing 1 more unit of output (MC=Change in TC/Change in Q).
question
Economies of Scale
answer
As plant size increases, a multitude of factors will for a time lead to lower average costs of production.
question
Diseconomies of Scale
answer
Difficulty of efficiently controlling and coordinating a firm's operations as it becomes a large-scale producer.
question
Constant Returns to Scale
answer
Long-run average cost does not change.
question
Minimum Efficient Scale (MES)
answer
Lowest level of output at which a firm can minimize long-run average costs.
question
Natural Monopoly
answer
Relatively rare market situation in which average total cost is minimized when only one firm produces the good/service.
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question
Economic/Opportunity Cost
answer
Value/Worth the resource would have in its best alternative use.
question
Explicit Costs
answer
Money payments for the use of resources owned by others.
question
Implicit Costs
answer
Money payments that self-employed resources could have earned in their best alternative use.
question
Normal Profit
answer
Minimum profit that a firm must receive in order to stay in business.
question
Economic Profit
answer
Total revenue less economic costs (both explicit and implicit).
question
Short Run
answer
Period of time too brief for a firm to alter its plant size.
question
Long Run
answer
Period of time long enough for a firm to adjust quantities of all resource that it employs as well as its plant size.
question
Total Product (TP)
answer
Total quantity/output of a produced good/service.
question
Marginal Product (MP)
answer
Extra output/product associated with adding an additional unit of variable resource (labor).
question
Average Product (AP)
answer
Output per unit of labor input (AP=TP/Units of Labor).
question
Law of Diminishing Returns
answer
As successive units of a variable resource are added to a fixed resource, MP attributed to each additional unit of the variable resource will decline.
question
Fixed Costs
answer
Costs that do not vary with changes in output.
question
Variable Costs
answer
Costs that change with levels of output.
question
Total Cost
answer
Sum of fixed costs and variable costs at each level of output (TC=TFC+TVC).
question
Average Fixed Cost (AFC)
answer
Total fixed cost divided by quantity of output (AFC=TFC/Q).
question
Average Variable Cost (AVC)
answer
Total variable cost divided by quantity of output (AVC=TVC/Q).
question
Average Total Cost (ATC)
answer
Total cost divided by quantity of output or the sum of average fixed cost and average variable cost (ATC=TC/Q=AFC+AVC).
question
Marginal Cost (MC)
answer
Extra/additional cost of producing 1 more unit of output (MC=Change in TC/Change in Q).
question
Economies of Scale
answer
As plant size increases, a multitude of factors will for a time lead to lower average costs of production.
question
Diseconomies of Scale
answer
Difficulty of efficiently controlling and coordinating a firm's operations as it becomes a large-scale producer.
question
Constant Returns to Scale
answer
Long-run average cost does not change.
question
Minimum Efficient Scale (MES)
answer
Lowest level of output at which a firm can minimize long-run average costs.
question
Natural Monopoly
answer
Relatively rare market situation in which average total cost is minimized when only one firm produces the good/service.
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