Fixed and variable costs, marginal cost, and production function concepts in microeconomic theory. Front: the term or concept. Back: a plain-language definition.
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- What is a production function?
- A relationship showing the maximum quantity of output that can be produced from given quantities of inputs.
- Define total product (TP).
- The total quantity of output produced at a given level of input use.
- Define marginal product (MP).
- The additional output produced by one more unit of input, holding all other inputs constant.
- Define average product (AP).
- The output per unit of input, calculated as total product divided by total input quantity.
- What is the law of diminishing marginal returns?
- As more units of a variable input are added to a fixed input, the marginal product of the variable input eventually decreases.
- What is the difference between increasing and decreasing marginal returns?
- Increasing returns occur when marginal product is rising; decreasing returns occur when marginal product is falling.
- Define fixed cost (FC).
- A cost that does not change with the level of output in the short run.
- Give two examples of fixed costs.
- Factory rent, property taxes, insurance, administrative salaries, or equipment depreciation (any costs remaining the same regardless of output).
- What is total fixed cost (TFC)?
- The sum of all fixed costs incurred by a firm at any output level.
- Define average fixed cost (AFC).
- Total fixed cost divided by the quantity of output produced.
- Why does average fixed cost decline as output increases?
- The same total fixed cost is spread over more units, so the cost per unit falls.
- Define variable cost (VC).
- A cost that changes with the level of output in the short run.
- Give two examples of variable costs.
- Raw materials, hourly labor wages, electricity for production, shipping, or packaging (any costs that increase with output).
- What is total variable cost (TVC)?
- The sum of all costs that vary with the output level.
- Define average variable cost (AVC).
- Total variable cost divided by the quantity of output produced.