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Technology
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The processes a firm uses to turn inputs into outputs 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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as a period of time during which at least one of a firm's inputs is fixed.
Example: A firm might have a long-term lease on a factory that is too costly to get out of.
Example: A firm might have a long-term lease on a factory that is too costly to get out of.
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long run
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the firm can vary all of its inputs, adopt new technology, and increase or decrease the size of its physical plant.
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Variable costs
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are costs that change as output changes.
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Fixed costs
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are costs that remain constant as output changes.
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Total cost
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is the cost of all the inputs a firm uses in production.
Total cost = Fixed cost +Variable cost
𝑇𝐶 = 𝐹𝐶 + 𝑉𝐶
Total cost = Fixed cost +Variable cost
𝑇𝐶 = 𝐹𝐶 + 𝑉𝐶
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Explicit cost
answer
A cost that involves spending money
The explicit costs of running a firm are relatively easy to identify: just look at what the firm spends money on.
The explicit costs of running a firm are relatively easy to identify: just look at what the firm spends money on.
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Implicit cost
answer
A non-monetary opportunity cost
The implicit costs are a little harder; finding them involves identify the resources used in the firm that could have been used for another beneficial purpose.
The implicit costs are a little harder; finding them involves identify the resources used in the firm that could have been used for another beneficial purpose.
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average product of labor
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calculated as the total output produced by a firm divided by the quantity of workers.
With 3 workers, the restaurant can produce 550 pizzas, giving an average product of labor of:
550/3=183.3
A useful way to think about this is that the average product of labor is the average of the marginal products of labor.
The first three workers give 200, 250, and 100 additional pizzas respectively:
(200+250+100)/3=183.3
With 3 workers, the restaurant can produce 550 pizzas, giving an average product of labor of:
550/3=183.3
A useful way to think about this is that the average product of labor is the average of the marginal products of labor.
The first three workers give 200, 250, and 100 additional pizzas respectively:
(200+250+100)/3=183.3
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marginal cost
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as the change in a firm's total cost from producing one more unit of a good or service:
𝑀𝐶=∆𝑇𝐶/∆𝑄
𝑀𝐶=∆𝑇𝐶/∆𝑄
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average fixed cost
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fixed cost divided by the quantity of output produced.
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average variable cost
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variable cost divided by the quantity of output produced.
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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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the firm's long-run average costs falling as it increases the quantity of output it produces
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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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its long-run average cost remains unchanged as it increases output
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diseconomies of scale
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a situation in which a firm's long-run average costs rise as the firm increases output
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A summary of definitions of cost
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