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firms
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organizations that produce goods and services
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short run
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a planning period over which the managers of a firm just consider one or more of their factors of production as fixed in quantity
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fixed factor of production
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a factor or production whose quantity cannot be changed during a particular period
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variable factor of production
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a factor or production whose quantity can be changed during a particular period
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long run
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planning period over which a firm can consider all factors of production as variable
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production function
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relationship between factors of production and the output of a firm
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total production curve
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graph that shows the quantities of output that can be obtained from different amounts of a variable factor or production, assuming other factors of production are fixed
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marginal product
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amount by which output rises with an additional unit of a variable factor
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marginal product of labor
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amount by which output rises with and additional unit of labor
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average product
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output per unit of variable factor
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average product of labor
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ratio of output to the number of units of labor
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increasing marginal returns
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range over which each additional unit of a variable factor adds more to total output than the previous unit
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diminishing marginal returns
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range over which each additional unit of a variable factor adds less to total output than the previous unit
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negative marginal returns
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range over which additional units of a variable factor reduce total output, given constant quantities of all other factors
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law of diminishing marginal returns
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marginal product of any variable factor or production will eventually decline, assuming the quantities of other factors of production are unchanged
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variable costs
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costs associated with the use of variable factors of production
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fixed costs
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costs associated with the use of fixed factors of production
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total value cost
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cost that varies with the level of output
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total fixed cost
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cost that does not vary with output
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total cost
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sum of total variable cost and total fixed cost
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average total cost
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total cost divided by quantity; the firm's total cost per unit of output
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average variable cost
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total variable cost divided by quantity; it is the firm's total variable cost per unit of output
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average fixed cost
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total fixed cost divided by quantity
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capital intensive
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situation in which a firm has a high ratio of capital to labor
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labor intensive
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situation in which a firm has a high ratio of labor to capital
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long-run average cost curve
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graph showing the firms lowest cost per unit at each level of output, assuming that all factors of production are variable
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economies of scale
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situation in which the long-run average cost declines as the firm expands its output
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diseconomies of scale
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situation in which the long-run average cost increases as the firm expands its output
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constant returns to scale
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situation in which the long-run average cost stays the same over an output range
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perfect competition
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model of the market based on the assumption that a large number of firms produce identical goods consumed by a large number of buyer
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price takers
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individuals or firms who must take the market price as given
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total revenue
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a firm's output multiplied by the price at which it sells that output
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marginal revenue
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the increase in total revenue from a one-unit increase in quantity
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average revenue
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total revenue divided by quantity
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economic loss
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amount by which a firm's total cost exceeds its total revenue
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shutdown point
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the minimum level of average variable cost, which occurs at the intersection of the marginal cost curve and the average variable cost curce
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explicit costs
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charges that must be paid for factors of production such as labor and capital
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accounting profit
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profit computed using only explicit costs
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implicit cost
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a cost that is included in the economic concept of opportunity cost but that is not an explicit cost
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constant-cost industry
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industry in which expansion does not affect the prices of factors of production
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increasing-cost industry
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industry in which the entry of new firms bids up the prices of factors of production and thus increases production costs
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decreasing-cost industry
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industry in which production costs fall in the long run as firms enter
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lont-run industry supply curve
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a curve that relates the price of a good or service to the quantity produced after all long-run adjustments to a price change have been completed
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