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Microeconomics
chapter 6,7,8
52
Economics
04/06/2011

Term
 factors of production
Definition
 inputs of a firm
Term
 production function
Definition
 indicates the highest output q that a firm can produce for every specified combination of inputs- q=F(K,L)
Term
 short run
Definition
 period of time in which the quantities of one or more factors of production cannot be changed. at least one fixed cost
Term
 long run
Definition
 amount of time needed to make all inputs variable
Term
 average product of labor
Definition
 - output per unit of labor input- q/L
Term
 marginal product of labor (MPL)
Definition
 additional output produced as the labor input is increased by 1 unit- (chnage in q)/(change in L)
Term
 law of diminishing marginal returns
Definition
 as the use of an input increases in equal increments (other inputs fixed), a point will eventually be reached at which the resulting additions to output decrease
Term
 labor productivity
Definition
 the average product of labor for an entire industry or for the economy as a whole
Term
 stock of capital
Definition
 the total amount of capital available for use in production
Term
 technological change
Definition
 development of new technologies allowing factors of production to be used more effectively
Term
 isoquant
Definition
 curve showing all possible combinations of inputs that yield the same output
Term
 marginal rate of technical substitution (MRTS)
Definition
 amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output remains constant - slope of isoquant
Term
 MRTS formula
Definition
 (change in K)/(change in L)
Term
 the ratio of the marginal products of the inputs is
Definition
 MRTS
Term
 fixed proportions production
Definition
 production function with L-shaped isoquants, so that only one combination of labor and capital can be used to produce each level of output
Term
 returns to scale
Definition
 rate at which output increases as inputs are increased proportionately
Term
 increasing returns to scale
Definition
 situation in which output more than doubles when all inputs are doubled
Term
 constant returns to scale
Definition
 output doubles when all inputs are doubled
Term
 decreasing returns to scale
Definition
 output less than doubles when all inputs are doubled
Term
 accounting cost
Definition
 actual expenses plus depreciation charges for capital equipment
Term
 economic cost
Definition
 cost to a firm of utilizing economic resources in production including opportunity costs
Term
 opportunity cost
Definition
 cost associated with opportunities that are forgone when a firms resources are not put in their best alternative use
Term
 sunk cost
Definition
 expenditure that has been made and cannot be recovered
Term
 prospective sunk cost
Definition
 investment
Term
 total cost
Definition
 total economic cost of production, consisting of fixed and variable costs
Term
 fixed cost
Definition
 cost that does not vary with the level of output and that can be eliminated only by shutting down
Term
 variable cost
Definition
 cost that varies as output varies
Term
 marginal cost
Definition
 increase in cost resulting from the production of one extra unit of output
Term
 marginal cost formula
Definition
 MC=(change in VC)/(change in q)which is the same asMC=(change in TC)/(change in q)
Term
 average fixed cost
Definition
 fixed cost divided by the level of outputAFC=FC/q
Term
 average variable cost
Definition
 variable cost divided by qVC/q
Term
 marginal cost using the wage rate
Definition
 MC=w/MPLw=wage rageMPL=(change in L)/(change in q)
Term
 user cost of capital
Definition
 annual cost of owning and using a capital asset, equal to the economic depreciation plus forgone interest
Term
 user cost of capital formula
Definition
 =(economic depreciation)+(int rate)(value of capital)
Term
 r
Definition
 deprecation rate + interest rate
Term
 isocost line
Definition
 shows all possible combinations of labor and capital that can be purchased for a given total cost
Term
 cost formula
Definition
 C=wL+rK
Term
 optimal condition
Definition
 MPL/w = MPk/r
Term
 expansion path
Definition
 curve passing through points of tangency between firms isocost and isoquant lines
Term
 long run average cost curve
Definition
 curve relating average cost of production to output when all inputs, including capital are variable
Term
 short run average cost curve
Definition
 curve relating average cost of production to output when level of capital is fixed
Term
 long run marginal cost curve
Definition
 curve showing the change in long run total cost as output is increased incrementally by 1 unit
Term
 economies of scale
Definition
 output can be doubled for less than a doubling of cost
Term
 diseconomies of scale
Definition
 doubling of output requires more than a doubling of cost
Term
 product transformation curves
Definition
 curve showing the various combinations of 2 different outputs that can be produced with a given set of inputs
Term
 economies of scope
Definition
 joint output of a single firm is greater than output that could be achieved by 2 different firms when each produces a single product
Term
 diseconomies of scope
Definition
 joint output of a single firm is less than could be achieved by separate firms when each produces a single product
Term
 perfect market assumptions
Definition
 1) price taking2) product homogeneity3) free entry and exit
Term
 cooperative
Definition
 association of businesses or people jointly owned and operated by members for mutual benefit
Term
 profit
Definition
 difference between total revenue and total cost
Term
 profit formula
Definition
 pi(q)=R(q)-C(q)
Term
 profit is maximized when
Definition
 MR(q)=MC(q)
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