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8.10: Key Terms

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    Production function: a technological relationship that specifies how much output can be produced with specific amounts of inputs.

    Technological efficiency means that the maximum output is produced with the given set of inputs.

    Economic efficiency defines a production structure that produces output at least cost.

    Short run: a period during which at least one factor of production is fixed. If capital is fixed, then more output is produced by using additional labour.

    Long run: a period of time that is sufficient to enable all factors of production to be adjusted.

    Very long run: a period sufficiently long for new technology to develop.

    Total product is the relationship between total output produced and the number of workers employed, for a given amount of capital.

    Marginal product of labour is the addition to output produced by each additional worker. It is also the slope of the total product curve.

    Law of diminishing returns: when increments of a variable factor (labour) are added to a fixed amount of another factor (capital), the marginal product of the variable factor must eventually decline.

    Average product of labour is the number of units of output produced per unit of labour at different levels of employment.

    Fixed costs are costs that are independent of the level of output.

    Variable costs are related to the output produced.

    Total cost is the sum of fixed cost and variable cost.

    Average fixed cost is the total fixed cost per unit of output.

    Average variable cost is the total variable cost per unit of output.

    Average total cost is the sum of all costs per unit of output.

    Marginal cost of production is the cost of producing each additional unit of output.

    Sunk cost is a fixed cost that has already been incurred and cannot be recovered, even by producing a zero output.

    Increasing returns to scale implies that, when all inputs are increased by a given proportion, output increases more than proportionately.

    Constant returns to scale implies that output increases in direct proportion to an equal proportionate increase in all inputs.

    Decreasing returns to scale implies that an equal proportionate increase in all inputs leads to a less than proportionate increase in output.

    Long-run average total cost is the lower envelope of all the short-run ATC curves.

    Minimum efficient scale defines a threshold size of operation such that scale economies are almost exhausted.

    Long-run marginal cost is the increment in cost associated with producing one more unit of output when all inputs are adjusted in a cost minimizing manner.

    Technological change represents innovation that can reduce the cost of production or bring new products on line.

    Globalization is the tendency for international markets to be ever more integrated.

    Cluster: a group of firms producing similar products, or engaged in similar research.

    Learning by doing can reduce costs. A longer history of production enables firms to accumulate knowledge and thereby implement more efficient production processes.

    Economies of scope occur if the unit cost of producing particular products is less when combined with the production of other products than when produced alone.

    A platform is a hardware-cum-software capital installation that has multiple production capabilities

    This page titled 8.10: Key Terms is shared under a CC BY-NC-SA 4.0 license and was authored, remixed, and/or curated by Douglas Curtis and Ian Irvine (Lyryx) via source content that was edited to the style and standards of the LibreTexts platform; a detailed edit history is available upon request.