ECONOMIC TERMS

August 6, 2008 at 5:11 am (ECONOMICS) ()

TOTAL PRODUCT

A very key assumption is that of the diminishing marginal product (or diminishing marginal returns). If we add more and more of the variable input(s) and there is at least one fixed input, then eventually the MP of the variable input will decline. The TP curve will flatten out as the quantity of the variable input increases.

AVERAGE PRODUCT

The average product of a factor in a firm or industry is its output divided by the amount of the factor employed.

MARGINAL PRODUCT

Marginal product In a production function, the marginal product of a factor is the increase in output due to a unit increase in the input of the factor; that is, the partial derivative of the production function with respect to the factor. In a competitive equilibrium, the equilibrium price of any factor is its marginal value product in every sector where it is employed.

LAW OF DIMINISHING RETURNS

Law of Diminishing Returns The principle that, in any production function, as the input of one factor rises holding other factors fixed, the marginal product of that factor must eventually decline.

FIXED INPUT

A fixed input is an input used in production and under the control of the producer that does not change during the time period of analysis (the short run).

VARIABLE INPUT

A variable input is an input used in production and under the control of the producer that does change during the time period of analysis (the short run).

PRODUCTION

The process of transforming the natural resources of the land into consumer satisfying consumption goods or productive capital goods. This transformation process involves the four scarce resources or factors of production–labor, capital, land, and entrepreneurship. Although production is generally the physical transformation of materials, it often involves the spatial relocation, or transportation, of commodities, as well.

PRODUCTION FUNCTION

Production function A function that specifies the output in an industry for all combinations of inputs.

SHORT RUN

Short run Referring to a short time horizon, usually one in which some aspects of behavior that would vary over a longer time do not have time to do so. In trade models, it usually means that the employment of some factors of production is fixed. Contrasts with long run.

LONG RUN

Long run Referring to a long time horizon. This is not always well defined, but in trade models it usually means long enough for industries to vary the amounts of all factors they employ, and therefore for the factors to be mobile across industries. Contrasts with short run.

ECONOMIES OF SCALE

Economies of scale Increasing returns to scale. Increasing returns to scale A property of a production function such that changing all inputs by the same proportion changes output more than in proportion. Common forms include homogeneous of degree greater than one and production with constant marginal cost but positive fixed cost. Also called economies of scale, scale economies, and simply increasing returns. Contrasts with decreasing returns and constant returns.

DISECONOMIES OF SCALE

Diseconomies of scale Decreasing returns to scale. Decreasing returns to scale A property of a production function such that changing all inputs by the same proportion changes output less than in proportion. Example: a function homogeneous of degree less than one. Also called simply decreasing returns. Not to be confused with diminishing returns, which refers to increasing some inputs while holding other inputs fixed. Contrasts with increasing returns and constant returns.

FIXED COST

Fixed cost The cost that a firm bears if it produces at all and that is independent of its output. The presence of a fixed cost tends to imply increasing returns to scale. Contrasts with variable cost.

VARIABLE COST

Variable cost The portion of a firm or industry’s cost that changes with output, in contrast to fixed cost

TOTAL COST

The opportunity cost incurred by all of the factors of production used by a firm to produce a good or service, including wages paid to labor, rent paid for the land, interest paid to capital owners, and a normal profit paid to entrepreneurs. Total cost is most important in the analysis a firm’s short-run production decision and is frequently separated into total variable cost and total fixed cost. Two other cost measures directly related to total cost are marginal cost and average total cost. Total cost is half of the information a firm uses to determine profit, the other half is total revenue.

AVERAGE COST

Total cost divided by output.

MARGINAL COST

Marginal cost The increase in cost that accompanies a unit increase in output; the partial derivative of the cost function with respect to output.

AVERAGE FIXED COST

Total fixed cost per unit of output, found by dividing total fixed cost by the quantity of output. When compared with price (per unit revenue), average fixed cost (AFC) indicates whether or not a profit-maximizing firm should shutdown production in the short run. Average fixed cost is one of three average cost concepts important to short-run production analysis. The other two are average total cost and average variable cost. A related concept is marginal cost.

AVERAGE VARIABLE COST

Total variable cost per unit of output, found by dividing total variable cost by the quantity of output. When compared with price (per unit revenue), average variable cost (AVC) indicates whether or not a profit-maximizing firm should shut down production in the short run. Average variable cost is one of three average cost concepts important to short-run production analysis. The other two are average total cost and average fixed cost. A related concept is marginal cost.

AVERAGE TOTAL COST

Total cost per unit of output, found by dividing total cost by the quantity of output. When compared with price (per unit revenue), average total cost (ATC) indicates the per unit profitability of a profit-maximizing firm. Average total cost is one of three average cost concepts important to short-run production analysis. The other two are average fixed cost and average variable cost. A related concept is marginal cost.

3 Comments

  1. Althine ^^, said,

    hehe… imee, thanks ha……. 3 nalang ang kulang sa assignment ko….. =)

  2. Althine ^^, said,

    imee, ang bait mo….. hehe… thanks talaga..

  3. CialisSoiniices said,

    ..] Thank you for reading this post. You can now Leave A Comment (0) or Leave A ..]

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