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production
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the process of turning inputs into outputs
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Production function
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the relationship between the quantity of inputs a firm uses and the quantity of output it produces, shown with the total product curve
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marginal product of an input
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the additional quantity of output that is produced by using one more unit of that input
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MPL equation
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change in output / change in labor = change Q / change L = Qend - Qinital / Lend - Linitial
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diminishing returns to an input
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an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input
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fixed input
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an input whose quantity is fixed for a period of time and cannot be varied
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variable input
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an input whose quantity the firm can vary at any time, assume labor is variable and capital is fixed
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short run
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the period of time during which at least one of a firm's inputs is fixed
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long run
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the time period in which all inputs can be varied
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minimum-cost output
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the quantity of output at which the average total cost is lowest—the bottom of the U-shaped average total cost curve.
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long run average total cost
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The cost per unit of producing each quantity of output in the long run, when all inputs are variable
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total product curve
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shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input. The slope of the curve is the marginal product of the variable input
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fixed cost
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a cost that does not depend on the quantity of output produced. It is the cost of the fixed input
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variable cost
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a cost that rises or falls depending on the quantity of output produced. It is the cost of the variable input
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total cost
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the cost of producing a given quantity of output and is the sum of the fixed cost and variable cost of producing the quantity of output.
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total cost equation
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TC = VC + FC
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marginal cost
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the change in total cost from one more unit of output. MC = change in total cost / change in quantity
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spreading effect
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the larger the output, the greater the quantity of output over which fixed cost is spread, leading to lower average fixed cost
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diminishing returns effect
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the larger the output, the more variable input required to produce additional units, which leads to higher average variable cost
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