COLLEGE ECONOMICS CHAPTER 6 DEFINITIONS

question

economic profit

answer

total revenue minus total cost, including both explicit and implicit costs

question

explicit costs

answer

payments to NON-owners of a firm for their resources

question

implicit costs

answer

opportunity costs of forgone returns to resources owned by a firm

question

normal profit

answer

The minimum profit necessary to keep a firm in operation.
- a normal profit is a ZERO economic profit and signifies there is JUST ENOUGH TOTAL REVENUE to pay owners for all EXPLICIT and IMPLICIT costs.

question

fixed input

answer

any resource which the QUANTITY CANNOT CHANGE during the period of time under consideration

question

variable input

answer

any resource which the QUANTITY CAN CHANGE during the period of time under consideration

question

short run

answer

the time period which a firm has AT LEAST 1 FIXED INPUT (such as factor size)

question

long run

answer

the time period which a firm has ALL INPUTS ARE VARIABLE

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production function

answer

the relationship between outputs and inputs. holding all other factors of production constant, the production function SHOWS THE TOTAL OUTPUT AS 1 INPUT (such as labor, varies)

question

marginal product

answer

the CHANGE IN TOTAL OUTPUT caused by a one-unit change in variable input (such as # of works hired)

question

the law of diminishing returns

answer

states that after some level of output in the SHORT RUN, each additional unit of the variable input YIELDS SMALLER AND SMALLER MARGINAL PRODUCT.

question

total fixed cost (TFC)

answer

consists of costs that do NOT VARY with the level of output (such as rent for office space)

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total variable cost (TVC)

answer

consists of costs that VARY with the level of output (such as wages)

the cost of of variable inputs used in production.

question

total cost (TC)

answer

the sum of TFC and TVC

question

marginal cost (MC)

answer

the CHANGE IN TOTAL COST associated with one additional unit of output

question

average fixed cost (AFC)

answer

TOTAL FIXED COST divided by TOTAL OUTPUT

question

average variable cost (AVC)

answer

TOTAL VARIABLE COST divided by TOTAL OUTPUT

question

average total cost (ATC)

answer

the TOTAL COST divided by OUTPUT
or
the sum of AFC and AVC

question

marginal average rule

answer

the relationship between MARGINAL COST and AVERAGE COST.
- when MARGINAL COST is LESS THAN AVERAGE COST, AVERAGE COST FALLS OUT
- when MARGINAL COST is GREATER THAN AVERAGE COST, AVERAGE COST RISES

question

long-run average cost (LRAC)

answer

a curve drawn tangent to all possible short-run average total cost curves

question

economies of scale

answer

when the long-run average cost (LRAC) curve DECREASES as OUTPUT INCREASES

question

constant returns to scale

answer

if the long-run average cost (LRAC) curve remains UNCHANGED as OUTPUT INCREASES, firms experiences...

question

diseconomies of scale

answer

if the long-run average cost (LRAC) curve INCREASES as OUTPUT INCREASES, a firm experiences...

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question

economic profit

answer

total revenue minus total cost, including both explicit and implicit costs

question

explicit costs

answer

payments to NON-owners of a firm for their resources

question

implicit costs

answer

opportunity costs of forgone returns to resources owned by a firm

question

normal profit

answer

question

fixed input

answer

any resource which the QUANTITY CANNOT CHANGE during the period of time under consideration

question

variable input

answer

any resource which the QUANTITY CAN CHANGE during the period of time under consideration

question

short run

answer

the time period which a firm has AT LEAST 1 FIXED INPUT (such as factor size)

question

long run

answer

the time period which a firm has ALL INPUTS ARE VARIABLE

question

production function

answer

the relationship between outputs and inputs. holding all other factors of production constant, the production function SHOWS THE TOTAL OUTPUT AS 1 INPUT (such as labor, varies)

question

marginal product

answer

the CHANGE IN TOTAL OUTPUT caused by a one-unit change in variable input (such as # of works hired)

question

the law of diminishing returns

answer

states that after some level of output in the SHORT RUN, each additional unit of the variable input YIELDS SMALLER AND SMALLER MARGINAL PRODUCT.

question

total fixed cost (TFC)

answer

consists of costs that do NOT VARY with the level of output (such as rent for office space)

question

total variable cost (TVC)

answer

consists of costs that VARY with the level of output (such as wages)

the cost of of variable inputs used in production.

question

total cost (TC)

answer

the sum of TFC and TVC

question

marginal cost (MC)

answer

the CHANGE IN TOTAL COST associated with one additional unit of output

question

average fixed cost (AFC)

answer

TOTAL FIXED COST divided by TOTAL OUTPUT

question

average variable cost (AVC)

answer

TOTAL VARIABLE COST divided by TOTAL OUTPUT

question

average total cost (ATC)

answer

the TOTAL COST divided by OUTPUT
or
the sum of AFC and AVC

question

marginal average rule

answer

the relationship between MARGINAL COST and AVERAGE COST.
- when MARGINAL COST is LESS THAN AVERAGE COST, AVERAGE COST FALLS OUT
- when MARGINAL COST is GREATER THAN AVERAGE COST, AVERAGE COST RISES

question

long-run average cost (LRAC)

answer

a curve drawn tangent to all possible short-run average total cost curves

question

economies of scale

answer

when the long-run average cost (LRAC) curve DECREASES as OUTPUT INCREASES

question

constant returns to scale

answer

if the long-run average cost (LRAC) curve remains UNCHANGED as OUTPUT INCREASES, firms experiences...

question

diseconomies of scale

answer

if the long-run average cost (LRAC) curve INCREASES as OUTPUT INCREASES, a firm experiences...

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