IB Economics Chapter 6

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Terms in this set (...)

The effect of workers on output
Law of diminishing returns: first output increases then decreases
Explicit cost
Payment made by a firm to an outsider to acquire resources
Marginal Product (MP)
The additional product per additional unit of variable input
Average Product
Product per unit of variable input
MP and AP curves
Law of Diminishing Returns
As more and more units of a variable input (like labour) are added to one or more fixed inputs (like land), the marginal product of the variable at first increases, but then decreases if the fixed input remains fixed
Total product
Total quantity of output produced by a firm
Implicit cost
Income sacrificed by a firm that uses a resource it owns
Economic cost
Sum of explicit and implicit cost. It's also the firm's total opportunity cost
Short run Costs
At least one input is fixed and cannot be changed by the firm.
Total fixed cost (TFC)
Costs that do not change as output changes. Ex: rent
Total variable cost (TVC)
Costs that vary/change as output changes. Ex: wage cost of labor
Total cost (TC)
The sum of fixed and variable costs
Average fixed cost (AFC)
Fixed cost per unit of output
Average variable cost (AVC)
Variable cost per unit of output
Average total cost (ATC)
Total cost per unit of output
Marginal cost (MC)
The additional cost of producing one additional unit of output
Long-run average total cost
A curve showing the lowest possible average cost that can be attained for any level of output when all of the firms outputs are variable
Total product (TP or Q)
The total amount (output) produced by a firm
Total Revenue
The total earnings of a firm from the sale of its output
Marginal Revenue
The additional revenue of a firm arising from the sale of an additional unit of output
Average Revenue
Revenue per unit of output
Economic Profit
Total revenue minus economic costs (or total opportunity costs, or the sum of explicit plus implicit costs)
Normal Profit (Break-even point)
The minimum amount of revenue required by a firm so that it will be induced to keep running, which is part of revenue that covers implicit costs, including entrepreneurship (after all explicit costs have been covered)
Short Run
The time period during which at least one input is fixed and cannot be changed by a firm (for example, a firm can change its labour size, but can't change the size of its firms in the short run)
Long Run
The time period when all inputs can be changed (no fixed variables)
Costs of production
When firms use resources to produce, they incur costs of production, which include money or anything else the firm had to give up to use those resources
Fixed Costs
Costs that arise from the use of fixed inputs
Variable Costs
Costs that arise from the use of variable inputs
Constant Returns to Scale
Means the output increases in the same proportion as all inputs (for example, if input is increased by 50%, output increases by 50% as well)
Increasing Returns to Scale
Means the output increases in a greater proportion than all inputs (for example, if input is increased by 50%, output increases by 70%)
Decreasing Returns to Scale
Means the output increases in a less proportion than inputs (for example, if input is increased by 50%, output increases by 30%)
Economies of Scale
The decreases in the average costs of production over the long run as a firm increases all inputs
Diseconomies of Scale
The increases in the average costs of production
Specialisation
Each worker is specialised in one thing, allowing increased efficiency
Supernormal/Abnormal Profit
if economic profit is greater than zero (normal profit)