Production and Costs

Brief definition of terms

1. A production function is the relationship between the quantity of inputs a firm uses
and the quantity of output it produces.
2. A fixed input is an input whose quantity is fixed for a period of time and cannot be
varied.
3. A variable input is an input whose quantity the firm can vary at any time.
4. The long run is the time period in which all inputs can be varied.
5. The short run is the time period in which at least one input is fixed.
6. The total product curve shows how the quantity of output depends on the quantity
of the variable input, for a given quantity of the fixed input.
7. The marginal product of an input is the additional quantity of output that is
produced by using one more unit of that input.
M P L = Q/L
Marginal product of labor
= Change in quantity of output / Change in quantity of labor
8. There are diminishing returns to an input when an increase in the quantity of that
input, holding the levels of all other inputs fixed, leads to a decline in the marginal
product of that input.
9. A fixed cost is a cost that does not depend on the quantity of output produced. It is
the cost of the fixed input.
10. A variable cost is a cost that depends on the quantity of output produced. It is the
cost of the variable input.
11. The total cost of producing a given quantity of output is the sum of the fixed cost
and the variable cost of producing that quantity of output.
12. The total cost curve shows how total cost depends on the quantity of output.
13. The marginal cost of producing a good or service is the additional cost incurred by
producing one more unit of that good or service.
Marginal cost =
MC= change in TC/ change in Q
= Change in total cost /Change in quantity of output

14. Average total cost, often referred to simply as average cost, is total cost divided by
quantity of output produced.
15. A U-shaped average total cost curve falls at low levels of output, and then rises at
higher levels.
16. Average fixed cost is the fixed cost per unit of output.
17. Average variable cost is the variable cost per unit of output.
18. Draw the TC, ATC. AVC, AFC and MC following the data
TC Quantity/day Fixed Variable Marginal ATC AVC AFC
cost cost Cost
200 0 200
300 1 200
363 2 200
400 3 200
433 4 200
458 5 200
480 6 200
500 7 200
538 8 200
600 9 200
700 10 200
900 11 200