Principles of Microeconomics 2e

# 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
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, $MC=ΔTC/ΔLMC=ΔTC/ΔL$
marginal product
change in a firm’s output when it employees more labor; mathematically, $MP=ΔTP/ΔLMP=ΔTP/ΔL$
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