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1. Constant returns (to scale): A situation in which output increases in proportion to inputs as the
scale of production is increased. A firm in this situation is a constant-cost firm.
2. Cost minimization: An implication of profit maximization that firms choose the production
method that produces any given level of output at the lowest possible cost.
3. Decreasing returns (to scale): A situation in which output increases less than in proportion to
inputs as the scale of a firm’s production increases. A firm in this situation is an increasing- cost
firm.
4. Economies of scale: Reduction of long-run average costs resulting from an expansion in the
scale of a firm’s operations so that more of all inputs is being used.
5. Increasing returns (to scale): A situation in which output increases more than in proportion to
inputs as the scale of a firm’s production increases. A firm in this situation is a decreasing-cost
firm
6. Long-run average cost (LRAC) curve: The curve showing the lowest possible cost of producing
each level of output when all inputs can be varied.
7. Minimum efficient scale (MES): The smallest output at which LRAC reaches its minimum. All
available economies of scale have been realized at this point.
8. Principle of substitution: The principle that methods of production will change if relative prices
of inputs change, with relatively more of the cheaper input and relatively less of the more.
9. Productivity: Output produced per unit of some input; frequently used to refer to labour
productivity, measured by total output divided by the amount of labour used.
10. Technical efficiency: When a given number of inputs are combined in such a way as to maximize
the level of output.