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AQA Economics Unit 3 Chapter 1: The Theory of Production
Key definitions
21
Economics
12th Grade
05/22/2014
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Term
Productive efficiency
 Definition
When a firm operates at minimum average total cost, producing the maximum possible output from inputs into the production process.
Term
Law of diminishing marginal returns
 Definition
Where increasing amounts of a variable factor are added to a fixed factor, eventually causing the amount added to total product by the addition of each variable factor to decrease.
Term
Minimum efficient scale
 Definition
Corresponds to the lowest point on the long-run average cost curve - known as the output of long-run productive efficiency.
Term
Fixed costs
 Definition
Costs of production which do not vary with output.
Term
Variable costs
 Definition
Costs of production which vary with output.
Term
Depreciation
 Definition
In relation to fixed assets, the fall in value of an asset during its working life.
Term
Optimal output
 Definition
The ideal combination of fixed and variable factors to produce the lowest average cost.
Term
Average product
 Definition
The total product divided by the total number of workers.
Term
Marginal product
 Definition
The output provided by an additional unit of a factor of production.
Term
Semi-variable costs
 Definition
Costs which have both a variable and fixed element.
Term
Average fixed cost
 Definition
Total fixed costs divided by the number produced.
Term
Average variable cost
 Definition
Total variable costs divided by the number produced.
Term
Average total cost
 Definition
Total cost divided by the number produced.
Term
Long run
 Definition
Period of time in which all factors of production become variable and the scale of production can change.
Term
Short run
 Definition
Period of time in which at least one factor of production is fixed, and the scale of production therefore remains fixed.
Term
Decreasing returns to scale
 Definition
Where an increase in factor inputs leads to a less than proportionate increase in factor outputs.
Term
Constant returns to scale
 Definition
Where an increase in factor inputs leads to a proportional increase in factor outputs.
Term
Increasing returns to scale
 Definition
Where an increase in factor inputs leads to a more than proportionate increase in factor outputs.
Term
Total cost
 Definition
Fixed costs + variable costs.
Term
Marginal cost
 Definition
The cost of one extra unit of output.
Term
Increasing marginal returns
 Definition
Where the addition of an extra variable factor adds more output than the previous variable factor.
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