Economic cost -- the opportunity cost of production, including both explicit and implicit costs
explicit cost -- the firm's actual cash payments for its imports
implicit cost -- the opportunity cost of nonpurchased inputs
marginal product of labor -- the change in input from one additional unit of labor
diminishing returns -- as one input increases while the other inputs are held fixed, output increases at a decreasing rate
total product curve -- a curve showing the relationship between the quantity of labor of the quantity of output produced
fixed cost (FC) -- costs that does not depend on the quantity produced
variable cost (VC) -- cost that varies as the firm changes its output
short run total cost (TC) -- the total cost of production in the short run, when one of more inputs (for example, the production facility) is fixed; equal to fixed cost plus variable cost
average fixed cost (AFC) -- fixed cost divided by the quantity produced
average variable cost (AVC) -- total variable cost divided by the quantity produced
short run average total cost (ATC) -- short run total cost divided by the quantity of output; equal to AFC plus AVC
short run marginal cost (MC) -- the change in short run total cost resulting from producing one or more unit of the good
long run total cost (LTC) -- the total cost of production in the long run when a firm is perfectly flexible in its choice of all inputs and can choose a production facility of any size
long-run average cost of production (LAC) -- long-run total cost divided by the quantity of output produced
long run marginal cost (LMC) -- the change in long-run cost from producing one or more unit of output
invisible input -- an input that cannot be scaled down to produce a smaller quantity of output
economies of scale -- a situation in which an increase in the quantity produced decreases the long-run average cost of production
minimum efficient scale -- the output at which the long-run average cost curve becomes horizontal
diseconomies of scale -- a situation in which an increase in the quantity produced increases the long-run average cost of production
Main points
The positively slow portion of the short run marginal cost curve (MC) results from diminishing returns.
The short run average total cost curve (ATC) is U-shaped because of the conflicting effects of:
- fixed costs being spread over a larger quantity of output
- diminishing returns.
The long-run average cost curve (LAC) is negatively slipped for small quantities of output because there are invisible input that cannot be scaled down and a smaller operation has limited opportunities for labor specialization.
Diseconomies of scale are rise if there are problems in coordinating a large operation or higher input costs in a larger organization.
