Chapter 7 Flashcards
Accounting profit
Total revenue minus explicit costs; including depreciation
Average profit/profit margin
Profit divided by quantity of output produced
Average total cost
Total cost divided by quantity of output
Average variable cost
Variable cost divided by quantity of output
Constant returns to scale
Expanding all inputs proportionally 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 revenue minus total costs (explicit + implicit costs)
Economies of scale
Long run average cost of producing output decreases as total output increases
Explicit costs
Out of pocket cost from a firm
(Example: Payments for wages, salaries ,rent ,materials)
Factors of production/ inputs
Resources firms use to produce their products
Firm
An organization that combines inputs of labor, capital, land, and raw or finished component materials to produce outputs
Fixed costs
Cost to fix inputs; Expenditure that a firm must make before production starts and that does not change regardless of production levels
Fixed inputs
Factors of production that can’t be easily increased/decreased in a short period of time
Implicit costs
Opportunity cost of resources already owned by a firm and used in business (example: expanding a factory to already owned land)
Long run
Period of time during which all of the 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 (MC=🔺️TC÷🔺️L)
Marginal product
Change in firm’s output when it employs more labor
(MP= 🔺️TP÷🔺️L)
Private enterprise
The ownership of a private business by private individuals
Production
The process of combining inputs to produce outputs (ideally of a value greater than value of inputs)
Production function
Mathematical equation that tells how much output a firm can produce with given amounts of inputs
Production technologies
Alternative methods of combining inputs to produce outputs
Revenue
Income from selling a firm’s product; defined as price times quantity sold
Short run
Period of time during which at least on or more of a firm’s inputs are 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 average of variable costs
Total costs
The sum of fixed and variable costs of production
Total product
Synonym for a firm’s outputs
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/decrease in a short period of time
