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