Microeconomics 7

Curve relating average cost of production to output

when all inputs, including capital, are variable.

Curve relating average cost of production to output when

level of capital is fixed.

Curve showing the change in long-run total cost as

output is increased incrementally by 1 unit.

1. If the firm operates on a larger scale, workers can specialize

in the activities at which they are most productive.

2. Scale can provide flexibility. By varying the combination of inputs utilized to produce the firm’s output, managers can organize the production process more effectively.

3. The firm may be able to acquire some production inputs at lower cost because it is buying them in large quantities and can therefore negotiate better prices. The mix of inputs might change with the scale of the firm’s operation if managers take advantage of lower-cost inputs.

1. At least in the short run, factory space and machinery may make it more difficult for workers to do their jobs effectively.

2. Managing a larger firm may become more complex and inefficient as the number of tasks increases.

3. The advantages of buying in bulk may have disappeared once certain quantities are reached. At some point, available supplies of key inputs may be limited, pushing their costs up.

Situation in which output can be doubled for less than a doubling of cost.

Situation in which a doubling of output requires more than a doubling of cost.

Output more than doubles when the quantities of all inputs are doubled.

Curve showing the various combinations of two different outputs (products)

that can be produced with a given set of inputs.

Situation in which joint output of a single firm is greater than output that could be achieved by two different firms when each produces a single product.

Situation in which joint output of a single firm is less than could be achieved by separate firms when each produces a single product.

Percentage of cost savings resulting when two or more products are

produced jointly rather than Individually.

Graph relating amount of inputs needed by a firm to produce each unit of output to its cumulative output.

A firm’s average cost of production can decline over time because of growth of sales when increasing returns are present (a move from A to B on curve AC1), or it can decline because there is a learning curve (a move from A on curve AC1 to C on curve AC2).

Function relating cost of production to level of output and other variables that the firm can control.

Cost to a firm of utilizing economic resources in production, including opportunity cost.

Cost associated with opportunities that are forgone when a firm’s resources are not put to their best alternative use.

Expenditure that has been made and cannot be recovered.

Total economic cost of production, consisting of fixed and variable costs.

Cost that does not vary with the level of output and that can be eliminated only by shutting down.

Cost that varies

as output varies.

Policy of treating a one-time expenditure as an annual cost spread out over some number of years.

Increase in cost resulting from the production of one extra unit of output.

Firm’s total cost divided by its

level of output.

Fixed cost divided by the level of

output.

Variable cost divided by the level of

output.

Annual cost of owning and using a capital asset, equal

to economic depreciation plus forgone interest.

Cost per year of renting one unit of capital.

Graph showing all possible combinations of labor and capital that can be

purchased for a given total cost.