# Chapter 13: Production and Cost

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### Depreciation

the fall in the value of the firm's capital, and accountants calculate it by using the IRS's rules, which are based on standards set by the Financial Accounting Standards Board

### Firm's Opportunity Cost

The cost of the factors of production it employs

### Explicit Cost

a cost paid in money

### Economic Depreciation

an opportunity cost of a firm using capital that it owns-- measured as the change in the market value of a capital over a given period

### Implicit cost

an opportunity cost incurred by a firm when it uses a factor of production for which it does not make a direct money payment

### Economic Profit

a firm's total revenue minus total cost

### Total cost

the sum of explicit and implicit costs and is the opportunity cost of production

### Short Run

the time frame in which the quantities of some resources are fixed

### Fixed resources

1. fixed factors of production
2. variable factors of production

### Long Run

the limit frame in which the quantities of all resources can be varied

### Sunk cost

The difference between the cost of the plant and the resale value

### Total Product (TP)

the total quantity of a good in a given period

### Marginal Product (MP)

the change in total product that results from a one-unit increase in the quantity of labor employed.
MP = change in TP/ change in Quantity labor

### Increasing Marginal Returns

occur when the marginal product of an additional worker exceeds the marginal product of the previous worker

### Decreasing Marginal Returns

when the marginal product of an additional worker is less than the marginal product of the previous worker.

### Law of decreasing returns

a firm uses more of a variable factor of production, with a given quantity of fixed factors of production, the marginal product of the variable factor eventually decreases

### Average Product (AP)

the total product per worker employed. Total product/Quantity of Labor

### Total Cost (TC)

the cost of all the factors of production used by a firm

### Total Fixed Cost (TFC)

the cost of the firm's fixed factors of production-- the cost of land, capital, and entrepreneurship

### Total Variable Cost (TVC)

the cost of the firm's variable factor of production-- the cost of labor. TFC + TVC

### Marginal Cost

the change in the total cost that results from a one-unit increase in output

### Average Fixed Cost (AFC)

the total fixed cost per unit of output

### Average Variable Cost (AVC)

total variable cost per unit of output

### Average Total Cost (ATC)

total cost per unit of output. AFC + AVC

### Economics of scale

a condition in which a firm increases its plant size and labor employed by the same %, its input increases by a larger % and its ATC decreases

### Diseconomies of Scale

a condition in which, when a firm increases its plant size and labor employed by the same %, its output increases by a smaller % and its ATC increases

### Constant Returns to Scale

a condition in which, when a firm increases its plant size and labor employed by the same % and its average cost remains constant

Example:

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