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Technology
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The processes a firm uses to turn inputs Labor (L) and Capital (K) into Outputs (Y) of goods and services.
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Technological Change
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A change in the ability of a firm to produce a given level of output with a given quantity of inputs.
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Short Run
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A period in which at least one of a firm's inputs is fixed.
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Long Run
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A period where no inputs are fixed.
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Variable Cost (V.C.)
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Costs that change as the output changes. (Labor)
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Average Variable Cost (A.V.C.) Equation
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(Variable Cost / Quantity of Output Produced)
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Fixed Cost (F.C.)
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Costs that remain constant as output changes. (Capital)
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Average Fixed Cost (A.F.C.) Equation
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(Fixed Cost / Quantity of Output Produced)
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Total Cost (TC) Equation
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(Fixed Cost + Variable Cost)
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Average Total Cost (A.T.C) Equation
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(Total Cost / Total Quantity)
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Marginal Cost Equation
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(Change in Total Cost / Change in Quantity)
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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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Economic Cost Equation
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(Explicit Cost + Implicit Cost)
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Production Function
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The relationship between the inputs employed and the maximum output of the firm.
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Average Product of Labor Equation
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(Total Output / Quantity of Workers)
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Marginal Product of Labor
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The additional output a firm produces as a result of hiring one more worker. Marginal Drives Average. If MPL > APL then APL Increases
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Law of Diminishing Returns
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The rule that adding more of a variable input to the same amount of a fixed input will cause the marginal product of the variable input to decline.
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Long-Run Average Cost Curve
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Shows the lowest cost at which a 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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A firm's long-run average costs decreases as the quantity of output produced increases.
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Diseconomies of Scale
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A firm's long-run average costs increases as the quantity of output increases.
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Minimum Efficient Scale
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The lowest level of output at which all economies of scale are exhausted.
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Constant Returns to Scale
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The long-run average cost is unchanged as quantity of output increases.
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Isoquant
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A curve showing all the combinations of two inputs, such as capital and labor, that will produce the same level of output.
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Isocost Line
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All the combinations of two inputs, capital and labor, with the same total cost.
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Marginal Rate of Technical Substitution (M.R.T.S.)
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The rate at which one factor must decrease so that the same level of productivity can be maintained when another factor is increased.
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Expansion Path
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A curve that shows a firm's cost-minimizing combination of inputs for every level of output.
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