KEY TERMS

accounting profit  total revenues minus explicit costs, including depreciation

average profit  profit divided by the quantity of output produced; also known as profit margin

average total cost  total cost divided by the quantity of output

average variable cost  variable cost divided by the quantity of output

constant returns to scale  expanding all inputs proportionately does not change the average cost of production

diminishing marginal productivity  general rule that as a firm employs more labor, eventually the amount of additional output produced declines

diseconomies of scale  the long-run average cost of producing output increases as total output increases

economic profit  total revenues minus total costs (explicit plus implicit costs)

economies of scale  the long-run average cost of producing output decreases as total output increases

explicit costs  out-of-pocket costs for a firm, for example, payments for wages and salaries, rent, or materials

factors of production (or inputs)  resources that firms use to produce their products, for example, labor and capital

firm  an organization that combines inputs of labor, capital, land, and raw or finished component materials to produce outputs.

fixed cost  cost of the fixed inputs; expenditure that a firm must make before production starts and that does not change regardless of the production level

fixed inputs  factors of production that can’t be easily increased or decreased in a short period of time

implicit costs  opportunity cost of resources already owned by the firm and used in business, for example, expanding a factory onto land already owned

long run  period of time during which all of a firm’s inputs are variable

long-run average cost (LRAC) curve  shows the lowest possible average cost of production, allowing all the inputs to production to vary so that the firm is choosing its production technology

marginal cost  the additional cost of producing one more unit; mathematically,

MC=ΔTC/ΔL

MC=ΔTC/ΔL

marginal product  change in a firm’s output when it employees more labor; mathematically,

MP=ΔTP/ΔL

MP=ΔTP/ΔL

private enterprise  the ownership of businesses by private individuals

production  the process of combining inputs to produce outputs, ideally of a value greater than the value of the inputs

production function  mathematical equation that tells how much output a firm can produce with given amounts of the inputs

production technologies  alternative methods of combining inputs to produce output

revenue  income from selling a firm’s product; defined as price times quantity sold

short run  period of time during which at least one or more of the firm’s inputs is fixed

short-run average cost (SRAC) curve  the average total cost curve in the short term; shows the total of the average fixed costs and the average variable costs

total cost  the sum of fixed and variable costs of production

total product  synonym for a firm’s output

variable cost  cost of production that increases with the quantity produced; the cost of the variable inputs

variable inputs  factors of production that a firm can easily increase or decrease in a short period of time