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Costs
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Refers to things that must be given up in order to have something else.
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Explicit costs
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The monetary payments that firms make to the owners of land, labor, and capital in the resource market (i.e. rent, wages, interest).
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Implicit costs
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The opportunity costs of entrepreneurs who decide to allocate their time and energy to one enterprise over other possible economic activities.
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Revenue
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The income earned from a firm's sale of its good or service to consumers in the product market.
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Profit
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The difference between a firm's total revenue earned in the product market and its total cost spent in the resource market. (P = TR-TC)
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Short run
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The period of time over which firms cannot acquire land or capital resources to increase production or take land or capital out of production, but within which labor can be applied to a greater or lesser degree in order to change output. The only variable resource during this time is labor.
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Long run
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The period of time where firms are able to acquire and put into production all factors of production - labor, land, capital, etc. - to produce output. All resources are variable during this time.
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Wages
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The monetary payments a firm faces as it pays its workers for their labor; an explicit short-run variable cost.
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Interest
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The explicit cost faced by a firm for its use of capital. Typically a fixed cost in the short run and a variable cost in the long run.
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Rent
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The explicit cost of land resources. Typically a fixed cost in the short run and a variable cost in the long run.
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Normal Profit
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The implicit cost an entrepreneur must cover in order to remain in business; the implied cost it takes to start a business.
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Productivity
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The amount of output attributable to a unit of input.
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Marginal Product
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The change in the total product attributable to the last worker hired.
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Average Product
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The output per worker hired.
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Law of Diminishing Returns
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As additional units of a variable resource (labor, etc.) are added to fixed resources (land, capital), beyond a certain point the marginal product of the variable resource will decline. Occurs in the short run only.
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Marginal and Total Product Relationship
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While marginal product is increasing, the slope of the total product curve is steeper. The total product curve will become flatter and flatter as the marginal product decreases. The total product curve will decline once the marginal product is less than zero.
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Marginal and Average Product Relationship
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Whenever marginal product is greater than the average product, the average product will increase. If marginal product is less than average product, the average product will decrease. The marginal product curve and the average product curve will always intersect at the average product curve's highest point.
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Fixed Costs
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Costs that must be paid by the producer and that do not change (i.e the cost per month to rent a factory)
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Variable Costs
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Costs that producers pay for variable resources, such as labor wages.
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Total Cost
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The grand total cost it takes to produce an output. Defined as fixed costs + variable costs.
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Economies of Scale
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The larger a firm becomes, the cheaper it is to produce one unit of output because of the cost advantages that a firm experiences as it expands. Long run concept only.
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Minimum Efficient Scale (MES)
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The size at which a firm achieves its lowest possible per-unit cost of production. Beyond this size, no further cost advantages accrue as the firm continues to expand.
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Diseconomies of Scale
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The larger a firm becomes, the average costs and decreased competitiveness grows larger and larger. Long run concept only.
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Factors of Economies of Scale
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1) Improved technology or machinery.
2) Better prices for raw materials such as plastic or rubber.
3) Lower shipping and transportation costs.
4) More productive workers and capital
2) Better prices for raw materials such as plastic or rubber.
3) Lower shipping and transportation costs.
4) More productive workers and capital
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Factors of Diseconomies of Scale
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1) Communication inefficiencies.
2) Office politics.
3) Increased government regulations.
2) Office politics.
3) Increased government regulations.
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Profit Maximization
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The process of a producer attempting to make their profits the absolute highest it can be. Achieved by reducing costs of labor, capital, etc. and increasing revenue.
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Total Revenue
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The grand total amount of revenue that a producer earns. Usually determined by multiplying price by output.
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Marginal Revenue
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The difference in total revenue between levels of output. For example, if total revenue increases from $400 to $600, the marginal revenue would be $200.
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Total Revenue and Marginal Revenue Relationship
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Total revenue is maximized when marginal revenue equals zero. This makes sense because if marginal revenue (difference in total revenue) isn't increasing, then total revenue is remaining the same - it's maximized.
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