Review for Midterm 3
Microeconomics 300
Instructor: Shana M. McDermott
Spring 2014
Chapter 6: Firms and Production
Key Terms
Firms
Partnerships
Corporations (limited liability)
Efficient production
Inputs (capital, labor, materials, natural
resource)
Production function (short-run and long-run)
Total product
Marginal product of labor
Average product of labor
Diminishing marginal returns
Isoquant
Marginal rate of technical substitution
(MRTS)
Returns to scale (constant, increasing,
decreasing)
Technical progress (neutral, non-neutral)
Concepts
 Short run: period in which at least one input (usually capital) cannot be varied (held
fixed).
 Long run: period in which all inputs can be varied.
 Total product curve: plots the relationship between the level of output, , and the level of
Labor, , while all else (including capital, ) remains constant.
 Average product of labor:
.
 Marginal product of labor:
.
 Isoquant: shows efficient combinations of labor and capital that can produce a single
level of output.
 Marginal rate of technical substitution: the absolute value of the slope of an isoquant
.
 Returns to scale: how output changes if all inputs are increased by equal proportions.
 Technical progress: advance in knowledge that allows more output to be produced with
the same level of inputs (neutral and non-neutral).
Chapter 7: Costs
Key Terms
Implicit cost
Fixed cost
Variable cost
Total cost
Output
Marginal cost
Average fixed cost
Average variable cost
Average total cost
Isocost line
Explicit cost
Expansion path
Long-run average cost
Economies of scale
Diseconomies of scale
Economies of scope
Concepts
 Opportunity cost (economic cost): value of the best alternative use of resources.
 Isocost line: plots capital and labor combinations requiring the same total expenditure
(cost).
 Maximizing profits requires economic efficiency, that is, choosing the lowest-cost way to
produce a given level of output. Equivalent ways to do this:
o (1) use the combinations of inputs on the isoquant that is on the lowest isocost
line touching the isoquant
o (2) choose the input combination where the relevant isoquant is tangent to an
isocost line
o (3) pick capital and labor so that
 Long-run average cost curve: the lower bound of all the short-run average cost curves. Its
shape is tied closely to returns to scale.
 Economies of scale: long-run average costs fall as output rise.
 Diseconomies of scale: long-run average costs rise as output rise.
 Economies of scope: less expensive to produce goods jointly than separately.