ECON 302 Chapter 5 Production & Cost

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Production Technology

answer

Method by which inputs (factors of production) are turned into outputs

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Labor

answer

The hours of time workers spent producing

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Capital

answer

Physical capital. Machines, equiptment, buildings used in production process

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Human Capital

answer

Knowledge and experience of workers

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Production function

answer

Function showing the highest output that a firm can produce for every specified combination of inputs q= F(L, K)

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Law of diminishing marginal returns

answer

The principle that as the use of an input increases the resulting additions to output will EVENTUALLY decrease

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Short run

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Period of time where one input is considered to be fixed. Typically, capital is considered fixed since it is easier to change the number of workers (or the amount of hours worked) than it is to change the size of a factory.

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Marginal Product of Labor

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The change in output that is the result of increasing the amount of labor used by 1 Unit MpL= q/L

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Average product of labor

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The average amount of output produced by workers APl=q/L

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Isoquant

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A curve showing all the possible combinations of inputs that yield a given amount of output

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Marginal rate of Technical Substitution MRTS

answer

The amount of which one input can be reduced when one extra unit of another input is used MRTS lk =MPL/MPK

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Fixed proportions production function

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Also called Leotief production function. A production function with L-Shaped isoquants so that only one combination of labor and capital can be used.

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Perfect substitues production function

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A production function where the MRtS is constant at all points. Isoquants are straight lines.

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Increasing Returns to Scale-

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Doubling input more than doubling output

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Constant returns to scale

answer

Doubling input doubles output

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Decreasing returns to scale

answer

Doubling input less than doubles output

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Explicit costs

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Also called accounting costs. Costs where one has to give up a sum of money

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Implicit costs

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Costs where one has to give up something of value that is not necessarily denominated in dollars

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Opportunity costs.

answer

Economic costs. The highest valued forgone alternative. The total dollar value of all payments actually made plus the dollar valye of all forgone opportunities

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Accounting profits

answer

Total revenue minus total explicit costs

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Economic profits

answer

Total revenue minus total explicit cost and implicit cost

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Sunk cost

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Pas costs that have been already incurred and cannot be recovered. Once a cost is sunk, only future costs are relevant to a decision

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Fixed cost

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A cost that is the same regardless of output

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Variable Cost

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A cost that changes as output changes

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Total cost

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The sum of all the costs for a given level of output

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Marginal Cost

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The amount that an additional unit adds to total cost MC- TC/Q

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Average total cost

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The total cost divided by the output

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Average variable cost

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The total variable cost divided by the output

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Long run

answer

Period of time where all inputs can be changed. In the long run, all costs are variable and there are no fixed costs.

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Input prices.

answer

The price paid by a firm for the factors of production. Total cost can be expressed as a function of the prices and quanitities of inputs

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Wage

answer

The input price for hiring labor

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Rental rate

answer

The input price for renting a unit of capital

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Increasing marginal costs

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The principle that marginal costs eventually rise as quanitiy of output increases. This can be caused by the law of diminishing marginal returns

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Isocost line

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All the different combinations of capital and labor that end up costing the same amount in total

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Cost minimization

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The process by which a firm chooses the quanitities of inputs that result in the lowest total cost of producing a given level of output. The cost-minimizing amounts of inputs will be associated with the optimizing condition MRTS-W/R

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Expansion Path

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The combinations of labor and capital that minimize the firms costs (given a set of input prices_ as the firm expands production

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Long run total cost curve

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A curve that shows the lowest cost isocost for each level of production when the firm can vary the levels of all inputs. In this case total cost will be expressed as a function of output q rather than as a function of the input prices TC=f(q)0

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Economies of scale

answer

Long run average costs fall as output (q) increases

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Diseconomies of scale

answer

Long run average costs rise as output (q) increases

1 of 39

question

Production Technology

answer

Method by which inputs (factors of production) are turned into outputs

question

Labor

answer

The hours of time workers spent producing

question

Capital

answer

Physical capital. Machines, equiptment, buildings used in production process

question

Human Capital

answer

Knowledge and experience of workers

question

Production function

answer

Function showing the highest output that a firm can produce for every specified combination of inputs q= F(L, K)

question

Law of diminishing marginal returns

answer

The principle that as the use of an input increases the resulting additions to output will EVENTUALLY decrease

question

Short run

answer

question

Marginal Product of Labor

answer

The change in output that is the result of increasing the amount of labor used by 1 Unit MpL= q/L

question

Average product of labor

answer

The average amount of output produced by workers APl=q/L

question

Isoquant

answer

A curve showing all the possible combinations of inputs that yield a given amount of output

question

Marginal rate of Technical Substitution MRTS

answer

The amount of which one input can be reduced when one extra unit of another input is used MRTS lk =MPL/MPK

question

Fixed proportions production function

answer

Also called Leotief production function. A production function with L-Shaped isoquants so that only one combination of labor and capital can be used.

question

Perfect substitues production function

answer

A production function where the MRtS is constant at all points. Isoquants are straight lines.

question

Increasing Returns to Scale-

answer

Doubling input more than doubling output

question

Constant returns to scale

answer

Doubling input doubles output

question

Decreasing returns to scale

answer

Doubling input less than doubles output

question

Explicit costs

answer

Also called accounting costs. Costs where one has to give up a sum of money

question

Implicit costs

answer

Costs where one has to give up something of value that is not necessarily denominated in dollars

question

Opportunity costs.

answer

Economic costs. The highest valued forgone alternative. The total dollar value of all payments actually made plus the dollar valye of all forgone opportunities

question

Accounting profits

answer

Total revenue minus total explicit costs

question

Economic profits

answer

Total revenue minus total explicit cost and implicit cost

question

Sunk cost

answer

Pas costs that have been already incurred and cannot be recovered. Once a cost is sunk, only future costs are relevant to a decision

question

Fixed cost

answer

A cost that is the same regardless of output

question

Variable Cost

answer

A cost that changes as output changes

question

Total cost

answer

The sum of all the costs for a given level of output

question

Marginal Cost

answer

The amount that an additional unit adds to total cost MC- TC/Q

question

Average total cost

answer

The total cost divided by the output

question

Average variable cost

answer

The total variable cost divided by the output

question

Long run

answer

Period of time where all inputs can be changed. In the long run, all costs are variable and there are no fixed costs.

question

Input prices.

answer

The price paid by a firm for the factors of production. Total cost can be expressed as a function of the prices and quanitities of inputs

question

Wage

answer

The input price for hiring labor

question

Rental rate

answer

The input price for renting a unit of capital

question

Increasing marginal costs

answer

The principle that marginal costs eventually rise as quanitiy of output increases. This can be caused by the law of diminishing marginal returns

question

Isocost line

answer

All the different combinations of capital and labor that end up costing the same amount in total

question

Cost minimization

answer

question

Expansion Path

answer

The combinations of labor and capital that minimize the firms costs (given a set of input prices_ as the firm expands production

question

Long run total cost curve

answer

question

Economies of scale

answer

Long run average costs fall as output (q) increases

question

Diseconomies of scale

answer

Long run average costs rise as output (q) increases

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