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short run
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a time frame in which the quantity of at least one factor of production is fixed. Fixed factors (called firm's "plant"): capital, land, and entrepreneurship. Variable factor: labor.
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long run
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time frame in which the quantities of all factors of production can be varied. A period in which the firm can change its plant.
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sunk cost
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past expenditure on a plant that has no resale value
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total product
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the maximum output that a given quantity of labor can produce
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marginal product of labor
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the increase in total product that results from a one-unit increase in the quantity of labor employed, with all other inputs remaining the same.
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average product of labor
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equal to the total product divided by the quantity of labor employed
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diminishing marginal returns
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occur when the marginal product of an additional worker is less than the marginal product of the previous worker
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the law of diminishing returns
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as a firm uses more of a variable factor of production with a given quantity of the fixed factor of production, the marginal product of the variable factor eventually diminishes.
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total cost (TC)
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the cost of all the factors of production a firm uses
TC = TFC + TVC
TC = TFC + TVC
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Total fixed cost (TFC)
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the cost of the firm's fixed factors
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Total variable cost (TVC)
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the cost of the firm's variable factors.
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marginal cost
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the increase in total cost that results from a one-unit increase in output. Calculated as the increase in total cost divided by the increase in output.
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Average fixed cost (AFC)
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the total fixed cost per unit of output
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Average variable cost (AVC)
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the total variable cost per unit of output
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Average total cost (ATC)
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the total cost per unit of output
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long-run average cost curve
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the relationship between the lowest attainable average total cost and output when the firm can change both the plant it uses and the quantity of labor it employs
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Economies of scale
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features of a firm's technology that makes average total cost FALL as output increases
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Diseconomies of scale
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features of a firm's technology that make average total cost rise as output increases. When diseconomies of scale are present, the LRAC curve slopes upward.
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Constant returns to scale
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features of a firm's technology that keep average cost constant as output increases.
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minimum efficient scale
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the smallest output at which long-run average cost reaches its lowest level.
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