Production and Cost Functions: every key term you need (+ practice quiz)
25 flashcard terms for Intermediate Microeconomics Topic 5, written to match the course framework. Study them here, then drill them as interactive flashcards, or test yourself with the 15-question quiz — free, no account needed.
The maximum output obtainable from each combination of inputs given the available technology. It embeds efficiency by assumption, so waste is excluded before the economics of choice begins.
Technology set
The collection of all input and output combinations that are technically feasible. The production function traces its upper boundary, which is why every interesting choice lies on that frontier.
Short run in production
A horizon over which at least one input, conventionally capital, cannot be varied. Fixed factors are what generate diminishing returns and the characteristic shape of short-run cost curves.
Long run in production
A horizon in which every input including plant size is adjustable. All costs are variable, so the long-run cost curve is the lower envelope of all possible short-run curves.
Marginal product
The extra output from one more unit of an input holding others fixed. It is the technological counterpart of marginal utility and drives the firm's input demand decisions.
Law of diminishing marginal product
Adding more of one variable input to fixed inputs eventually raises output by ever smaller amounts, because each unit works with a shrinking share of the fixed factor.
Average product
Output divided by the quantity of an input. Marginal product cuts average product from above at its maximum, the same arithmetic that makes marginal cost cross average cost at its minimum.
Isoquant
The set of input combinations producing a given level of output. It plays the role in production that an indifference curve plays in consumption, but its level is measurable output rather than an ordinal index.
Technical rate of substitution
The rate at which one input can be reduced when another rises while output is held constant, equal to the ratio of marginal products and the slope of the isoquant.
Elasticity of substitution
A measure of how easily inputs replace one another, defined as the responsiveness of the input ratio to the ratio of their marginal products. High values mean nearly interchangeable factors.
Returns to scale
How output responds when every input is scaled by the same factor. Constant, increasing and decreasing returns describe proportional, more than proportional and less than proportional responses.
Increasing returns to scale
Doubling all inputs more than doubles output, typically through specialisation or fixed overheads spread wider. It is the technological source of natural monopoly.
Isocost line
Input combinations of equal total expenditure, with slope equal to minus the ratio of input prices. Cost minimisation is a tangency between an isocost line and the target isoquant.
Cost minimisation condition
At the optimum the technical rate of substitution equals the ratio of input prices, equivalently the marginal product per dollar is equalised across inputs. Otherwise a cheaper input mix exists.
Conditional factor demand
The cost-minimising quantity of an input as a function of input prices and the target output level. It is conditional because output is taken as given rather than chosen.
Cost function
Minimum total cost as a function of output and input prices. It summarises everything about the technology that matters for pricing and supply decisions.
Fixed cost
Cost that does not vary with output in the short run, such as a leased plant. It shifts the average cost curve but leaves marginal cost untouched, so it never affects the profit-maximising quantity.
Sunk cost
Spending already incurred and unrecoverable. Because it cannot be changed by any current decision it must be excluded from marginal reasoning, however painful the accounting looks.
Variable cost
Cost that moves with output, chiefly labour and materials. Its slope is marginal cost and its shape inherits the diminishing returns of the underlying short-run technology.
Average total cost
Total cost per unit of output, the sum of average fixed and average variable cost. Its U shape reflects spreading of fixed cost against rising marginal cost from diminishing returns.
Marginal cost
The addition to total cost from one more unit of output. It is the only cost concept that belongs in the output decision, since it is the sole cost that changes with the marginal unit.
Marginal cost and average cost relation
Average cost falls where marginal cost lies below it and rises where marginal cost lies above, so marginal cost passes through the minimum of average cost.
Long-run average cost envelope
The lower boundary of all short-run average cost curves, since with time the firm picks the plant size best suited to each output level. It never lies above any short-run curve.
Economies of scale
Falling long-run average cost as output expands. They arise from indivisibilities, specialisation and spreading fixed costs, and they limit how many firms a market can sustain.
Economies of scope
Cost savings from producing several products together rather than separately, arising from shared inputs or capacity. They explain multiproduct firms that no scale argument alone would justify.