260
Cost
Other important cost concepts are the learning curve effect, cost complementarities, and economies of scope. The learning curve effect is the reduction in per-unit cost resulting from increased worker productivity due to increased worker experience. “Economies of scope” refers to the reduction in per-unit cost resulting from the joint production of two or more goods or services, such as the production of automobiles and trucks, or beef and leather, by the same producer. Cost complementarities exist when the marginal cost of producing one good is reduced by increasing the production of another good.
KEY TERMS AND CONCEPTS Average fixed cost (AFC) Total fixed cost of production per unit of output. AFC is total fixed cost divided by total output (i.e., AFC = TFC/Q). Average fixed cost is a short-run production concept. It is the average cost associated with the firm’s fixed factor of production. Average total cost (ATC) The total cost of production per unit of output: ATC is total cost divided by total output (i.e., ATC = TC/Q). Average total cost is a short-run production concept if total costs include total fixed costs. It is a long-run production concept if all costs are variable costs. Average variable cost (AVC) Total variable cost of production per unit of output: AVC is total variable cost divided by total output (i.e., AVC = TVC/Q). Constant returns to scale Output rises proportionately with the increase in all productive inputs, and per-unit costs remain constant. Cost complementarities When the marginal cost of producing one good is reduced by increasing the production of another good, there are cost complementarities. Direct cost Same as explicit cost. Diseconomies of scale An increase in long-run average total cost. It is conceptually related to the long-run production concept of decreasing returns to scale. Economies of scale A decrease in long-run average total cost. It is conceptually related to the long-run production concept of increasing returns to scale. Economies of scope Realized when the total cost of using a single production facility to produce two or more goods or services is lower than the cost of using separate production facilities. Experience curve effect A measure of the relation between an increase in per-worker productivity (a decrease in per-unit labor cost at fixed labor prices) associated with an improvement in labor skills from onthe-job experience, the adoption of new production, organizational, and