An input (or factor of production) is a good or service used to produce output.

A production technique is technically efficient if there is no other way to make a given output using less of one input and no more of the other inputs. The production function is the set of all technically efficient techniques.

A technique is a particular way to combine inputs to make output. Technology is the list of all known techniques.

Technical progress is a new technique allowing a given output to be made with fewer inputs than before.

The long run is the period long enough for the firm to adjust all its inputs to a change in conditions. In the short run the firm can make only partial adjustment of its inputs to a change in conditions.

Long-run total cost (LTC) is the minimum cost of producing each output level when the firm can adjust all inputs.

Long-run marginal cost is the rise in long-run total cost if output rises permanently by one unit.

Long-run average cost is the total cost LTC divided by the level of output Q.

Economies of scale (or increasing returns to scale) mean long-run average cost falls as output rises. Diseconomies of scale (or decreasing returns to scale) mean long-run average cost rises as output rises. Constant returns to scale mean long-run average costs are constant as output rises.

Minimum efficient scale (MES) is the lowest output at which the LAC curve reaches its minimum.

Globalization is the increasing integration of national markets that were previously much more segmented from one another.

A fixed factor of production is an input that cannot be varied. A variable factor can be varied, even in the short run.

Fixed costs do not vary with output.

Variable costs change as output changes.

The marginal product of a variable factor is the extra output from an extra unit of that input, holding constant all other inputs.

Holding all factors constant except one, the law of diminishing returns says that, beyond some level of the variable input, further increases in the variable input lead to a steadily decreasing marginal product of that input.

Short-run marginal cost is the extra cost of making an extra unit of output in the short run while some inputs remain fixed.

Short-run average fixed cost (SAFC) equals short-run fixed cost (SFC) divided by output. Short-run average variable cost (SAVC) equals SVC divided by output and short-run average total cost (SATC) equals STC divided by output.

The firm’s short-run output decision is to supply Q1, the output at which MR = SMC, if the price covers short-run average variable cost SAVC1 at that output. If not, the firm supplies zero.