Vocabulary: Unit Four Flashcards
Proprietorship
Sole owner
Partnership
Two or more owners
Corporation
A company with multiple owners; legally separate from the owners
Dividends
A share of the corporation’s profits
Stock
Shares in the company in exchange for the money invested; gives owners a right to vote on members of the Board of Directors and the possibility of dividends
Production function
The maximum quantity the firm can produce with a given combination of resources
Cost function
The relationship between output and the cost of producing that output
Explicit costs
Opportunity costs of the resources that the firm pays for with cash
Implicit costs
The opportunity costs of using the firm’s resources that are provided by the firm’s owners without a cash payment
Total revenue
The price of the product multiplied by the total quantity sold
Profit
Total revenue minus total costs
Normal profit
The accounting profit earned when all resources used earn their opportunity cost; “breaking even”
Economic profit
The income business owners receive after explicit and implicit costs have been subtracted from the total revenue
Fixed resource
A resource that can’t be varied in the short run
Variable resource
A resource that can be varied in order to increase or decrease the level of output in the short run
Short run
The period when at least one of the firm’s resources is fixed
Long run
The period when all resources used by the firm can be varied
Fixed costs
Production costs independent of the level of output that don’t change in the short run
Variable costs
Production costs that increase as the level of output increases
Marginal
Incremental; adding or subtracting one more unit
Marginal product
The additional output that can be produced by adding one more unit of a specific input
Increasing marginal returns
The marginal product increases due to the use of one additional unit of a resource
Diminishing marginal returns
A natural function of the production process
Law of diminishing returns
In the production process, there is a point where an increase in a variable factor of production results in a decline in the additional production derived from one more unit of hat particular factor
Marginal cost
The additional cost when one additional unit of output is added; inversely related to marginal product
Total cost function
A summary picture of the firm’s short run cost structure
Least cost of production
The point where the short-run average cost curve and the long run average cost curve intersect
Economies of scale
Experienced when a firm grows and simultaneously experiences a reduction in cost per unit
Constant returns to scale
The average total cost neither increases or decreases with the change in the firm’s output
Diseconomies of scale
Experienced when a firm grows and simultaneously experiences an increase in cost per unit
Accounting profit
Total revenue minus only explicit costs
Diminishing marginal returns
Diminishing returns or diminishing marginal product; implies that costs are increasing per unit produced
