| Term | Definition |
|---|
| technology | the processes a firm uses to turn inputs into outputs of goods and services |
| technological change | a change in the ability of a firm to produce a given level of output with a given quantity of inputs |
| short run | the period of time during which at least one of a firm's inputs is fixed |
| long run | the period of time in which a firm can vary all its inputs, adopt new technology and increase or decrease the size of its physical plant. |
| total cost | the costs of all the inputs a firm uses in production |
| variable costs | costs that change as output changes |
| fixed costs | costs that remain constant as output changes |
| opportunity cost | the highest-valued alternative that must be given up to engage in an activity |
| explicit cost | a cost that involves spending money |
| implicit cost | a nonmonetary opportunity cost. |
| production function | the relationship between the inputs employed by a firm and the maximum output it can produce with those inputs. |
| average total cost | total cost divided by the quantity of output produced |
| marginal product of labor | the additional output a firm produces as a result of hiring one more worker |
| law of diminishing returns | the principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline. |
| average product of labor | the total output produced by a firm divided by the quantity of workers |
| Marginal cost | the change in a firm's total cost from producing one more unit of a good or service. |
| Average fixed cost | fixed cost divided by the quantity of output produced |
| average variable cost | variable cost divided by the quantity of output produced |
| Long-run average cost curve | a curve showing the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no outputs are fixed. |
| economies of scale | the situation when a firm's long-run average costs fall as it increases output. |
| constant returns to scale | the situation when a firm's long-run average cost remains unchanged as it increases output. |
| minimum efficient scale | the level of output at which all economies of scale are exhausted |
| diseconomies of scale | the situation when a firm's long-run average costs rise as the firm increases output. |
| Isoquant | a curve that shows all the combinations of two inputs, such as capital and labor, that will produce the same level of output |
| Marginal rate of technical substitution | the slope of an isoquant, or the rate at which a firm is able to substitute one input for another while keeping the level of output constant |
| Isocost line | All the combinations of two inputs, such as capital and labor, that have the same total cost. |
| expansion path | a curve that shows a firm's cost-minimizing combination of inputs for every level of output. |
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