Technology, Production and Costs

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Short run

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The period of time during which at least one of the firm's inputs is fixed.

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Long run

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A period of time long enough to allow a firm to vary all of its inputs, to adopt new technology, and to increase or decrease the size of its physical plant.

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Total cost

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The cost of all the inputs a firm uses in production
Total Cost = Fixed Cost + Variable Cost

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Variable costs

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Costs which change as the quantity of output changes.

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Fixed costs

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Costs which remain constant as the quantity of output changes.

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Explicit cost

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A cost that involves spending money.

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Implicit cost

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A non-monetary opportunity cost.

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Production function

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The relationship between the inputs employed by the firm and the maximum output it can produce with those inputs.

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Marginal product of labour

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The additional output a firm produces as a result of hiring one more worker.

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Law of diminishing returns

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The principle that, at some point, adding more of a variable input, such as labour, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline.

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Marginal cost

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The change in a firm's total cost from producing one more unit of a good or service.
MC = ∆TC/∆Q

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Long-run average cost curve

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A curve showing the lowest cost at which the firm is able to produce a given quantity of output in the long run, when no inputs are fixed.

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Economies of scale

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Economies of scale exist when a firm's long-run average costs fall as it increases its scale of production and the quantity of output it produces.

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Constant returns to scale

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Exist when a firm's long-run average costs remain unchanged as it increases its scale of production and the quantity of output it produces.

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Minimum efficient scale

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The level of output at which all economies of scale have been exhausted. It is the minimum point on the long-run average cost curve.

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Diseconomies of scale

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Exist when a firm's long- run average costs rise as it increases its scale of production and the quantity of output it produces.

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question

Short run

answer

The period of time during which at least one of the firm's inputs is fixed.

question

Long run

answer

A period of time long enough to allow a firm to vary all of its inputs, to adopt new technology, and to increase or decrease the size of its physical plant.

question

Total cost

answer

The cost of all the inputs a firm uses in production
Total Cost = Fixed Cost + Variable Cost

question

Variable costs

answer

Costs which change as the quantity of output changes.

question

Fixed costs

answer

Costs which remain constant as the quantity of output changes.

question

Explicit cost

answer

A cost that involves spending money.

question

Implicit cost

answer

A non-monetary opportunity cost.

question

Production function

answer

The relationship between the inputs employed by the firm and the maximum output it can produce with those inputs.

question

Marginal product of labour

answer

The additional output a firm produces as a result of hiring one more worker.

question

Law of diminishing returns

answer

question

Marginal cost

answer

The change in a firm's total cost from producing one more unit of a good or service.
MC = ∆TC/∆Q

question

Long-run average cost curve

answer

A curve showing the lowest cost at which the firm is able to produce a given quantity of output in the long run, when no inputs are fixed.

question

Economies of scale

answer

Economies of scale exist when a firm's long-run average costs fall as it increases its scale of production and the quantity of output it produces.

question

Constant returns to scale

answer

Exist when a firm's long-run average costs remain unchanged as it increases its scale of production and the quantity of output it produces.

question

Minimum efficient scale

answer

The level of output at which all economies of scale have been exhausted. It is the minimum point on the long-run average cost curve.

question

Diseconomies of scale

answer

Exist when a firm's long- run average costs rise as it increases its scale of production and the quantity of output it produces.

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