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# ECN Terms C6-9

Production Function Relationship between inputs and outputs; q=f(K,L,M,...)
Firm Any organization that turns inputs into outputs.
Marginal Product Additional output that can be produced by adding one more unit of a particular input while holding all other inputs constant.
Isoquant Map Contour map of a firm's production function.
Isoquant A curve that shows the various combinations of inputs that will produce the same amount of output.
Marginal Rate of Technical Substitution (RTS) Amount by which one input can be reduced when one more unit of another input is added while holding output constant. Negative slope of an isoquant.
Returns to Scale The rate at which output increases in response to proportional increases in all inputs.
Fixed-Proportions Production Function A production function in which the inputs must be used in a fixed ratio to one another.
Technical Progress A shift in the production function that allows a given output level to be produced using fewer inputs.
Opportunity Cost The cost of a good as measured by the alternative uses that are forgone by producing the good.
Accounting Cost Concept that inputs cost what was paid for them.
Economic Cost Amount required to keep an input in its present use; the amount that it would be worth in its next best alternative use.
Wage Rate (w) Cost of hiring one worker for one hour.
Sunk Cost Expenditure that once made cannot be recovered.
Rental Rate (v) Cost of hiring one machine for one hour.
Economic Profits (pi) The difference between a firm's total revenues and its total economic costs.
Expansion Path The set of cost-minimizing input combinations a firm will choose to produce various levels of outputs (when the prices of inputs are held constant).
Average Cost Total cost divided by output; a common measure of cost per unit.
Marginal Cost Additional cost of producing one more unit of output.
Short Run The period of time in which a firm must consider some inputs to be fixed in making its decisions.
Long Run The period of time in which a firm may consider all of its inputs to be variable in making its decisions.
Fixed Costs Costs associated with inputs that are fixed in the short run.
Variable Costs Costs associated with inputs that can be varied in the short run.
Economies of Scope Reductions in the costs of one product of a multiproduct firm when the output of another product is increased.
Marginal Revenue Extra revenue a firm receives when it sells one more unit of output.
Price Taker A firm or individual whose decisions regarding buying or selling have no effect on the prevailing market price of a good.
Marginal Revenue Curve Curve showing the relation between the quantity a firm sells and the revenue revenue yielded by the last unit sold. Derived from the demand curve.
Firm's Short-Run Supply Curve Relationship between price and quantity supplied by a firm in the short run.
Shutdown Price The price below which the firm will choose to produce no output in the short run. Equal to minimum average variable cost.
Supply Response Change in quantity of output supplied in response to a change in demand conditions.
Market Period Short period of time during which quantity supplied is fixed.
Equilibrium Price Price at which the quantity demanded by buyers of a good is equal to the quantity supplied by sellers of the good.
Short-Run Market Supply Curve The relationship between market price and quantity supplied of a good in the short run.
Short-Run Elasticity of Supply Percentage change in quantity supplied in the short run in response to a one percent change in price.
Constant Cost Case Market in which entry or exit has no effect on the cost curves of firms.
Increasing Cost Case Market in which the entry of firms increases firms' costs.
Long-Run Elasticity of Supply Percentage change in quantity supplied in the long run in response to a one percent change in price.
Consumer Surplus Extra value individuals receive from consuming a good over what they pay for it. What people would be willing to pay for the right to consume a good at its current price.
Producer Surplus Extra value producers get for a good in excess of the opportunity costs they incur by producing it. What all producers would pay for the right to sell a good at its current market price.
Ricardian Rent Long-run profits earned by owners of low-cost firms. May be capitalized into the prices of these firms' inputs.
Economically Efficient Allocation of Resources Allocation of resources in which the sum of consumer and producer surplus is maximized. Reflects the best (utility-maximizing) use of scarce resources.
Tax Incidence Theory Study of the final burden of a tax after considering all market reactions to it.
Deadweight Loss Losses of consumer and producer surplus that are not transferred to other parties.
Tariff Tax on an imported good. May be equivalent to a quota or a nonquantitative restriction on trade.
Created by: starrydays

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