Module 5 Key Words Flashcards
Accounting Profit
Accounting profit is total revenues minus explicit costs, including depreciation. This is the accountant’s perspective on profits. Explicit costs would include payments for energy, wages, property rentals, equipment
charges, maintenance costs, and such.
Average Profit
Average profit is the total revenues, net of costs, divided by the quantity of output produced. It is the profit per unit produced. It also known as the profit margin per unit.
Average Total Cost
average total cost is total cost (variable costs plus fixed costs) divided by the quantity of output.
Calculated as (VC + FC)/Q
Average Variable Cost
average variable cost is variable cost divided by the quantity of output. Variable costs increase with the quantity produced.
For instance, labour and energy costs typically rise as firms produce more.
However, the cost of the land their factory is on would not change simple because they produced more.
Constant Returns To Scale
Constant Returns To Scale (CRS) implies that expanding all inputs proportionately does not change the average cost of production.
For instance, if I doubled the number of machines and labour I used and output
also doubled, then production would be Constant Returns To Scale.
Diminishing Marginal Productivity
Diminishing Marginal Productivity is the general rule that as a firm employs more labour, eventually the amount of additional output produced declines.
Diseconomies Of Scale
Diseconomies of scale occurs when the long-run average cost of producing output increases as total output increases.
Alternately, diseconomies of scale occur when average costs (total costs divided by
output) rises when we increase production
Economic Profit
Economic Profits occur when total revenues minus total costs (both explicit plus implicit costs) is positive.
Explicit costs include direct expenditures on labour, energy, and equipment.
Implicit costs include those things that have an opportunity cost but do not imply a direct cash payment. For instance, using your garage for a business may not have any direct costs since you own the garage. But you could have rented out the garage and so there is an implicit opportunity
cost.
Economies Of Scale
Economies of scale occur in the long-run when average cost of producing output decreases as total output increases.
Alternately, economies of scale occur when average costs (total costs divided by output) falls when we increase production.
Explicit Costs
Explicit Costs are out-of-pocket costs for a firm. For example, payments for wages and salaries, rent, or materials all imply a cash outlay and so are explicit.
Factors Of Production
Factors of production are resources that firms use to produce their products. For example, labor, capital, energy, and land are
all common productive inputs.
Firm
A firm is an organization that combines inputs of labor, capital, land, and raw or finished component materials to produce outputs.
Firms can be privately held (this is the most common). However, we would also include publically owned organizations such as hospitals and schools.
Fixed Cost
Fixed costs are the implicit and explicit costs associated with the fixed inputs.
These are expenditures that a firm must make (sometimes before production starts) and that does not change regardless of the production level. For example, rent paid by a retail shop would be a fixed cost since
the property owner may not charge more the long the shop is open
Fixed Inputs
Fixed inputs are factors of production that can’t be easily increased or decreased in a short period of time. For instance, the size of a retail space is often fixed. You can increase the size, but it can take time to do so.
Implicit Costs
Implicit costs are the opportunity cost of resources already owned by the firm and used in business.
For example, expanding a factory onto land already owned does not incur any direct land costs. But that land may have alternative uses and so entails an opportunity cost.
