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