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accounting profit
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total revenues minus explicit costs, including depreciation
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average profit
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profit divided by the quantity of output produced; also known as profit margin
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average total cost
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total cost divided by the quantity of output
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average variable cost
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variable cost divided by the quantity of output
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constant returns to scale
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expanding all inputs proportionately does not change the average cost of production
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diminishing marginal productivity
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general rule that as a firm employs more labor, eventually the amount of additional output produced declines
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diseconomies of scale
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the long-run average cost of producing output increases as total output increases
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economic profit
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total revenues minus total costs (explicit plus implicit costs)
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economies of scale
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the long-run average cost of producing output decreases as total output increases
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explicit costs
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out-of-pocket costs for a firm, for example, payments for wages and salaries, rent, or materials
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factors of production (or inputs)
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resources that firms use to produce their products, for example, labor and capital
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firm
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an organization that combines inputs of labor, capital, land, and raw or finished component materials to produce outputs.
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fixed cost
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cost of the fixed inputs; expenditure that a firm must make before production starts and that does not change regardless of the production level
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fixed inputs
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factors of production that can't be easily increased or decreased in a short period of time
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implicit costs
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opportunity cost of resources already owned by the firm and used in business, for example, expanding a factory onto land already owned
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long run
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period of time during which all of a firm's inputs are variable
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long-run average cost (LRAC) curve
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shows the lowest possible average cost of production, allowing all the inputs to production to vary so that the firm is choosing its production technology
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marginal cost
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the additional cost of producing one more unit; mathematically, MC=ΔTC/ΔL
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marginal product
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change in a firm's output when it employees more labor; mathematically, MP=ΔTP/ΔL
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private enterprise
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the ownership of businesses by private individuals
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production
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the process of combining inputs to produce outputs, ideally of a value greater than the value of the inputs
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production function
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mathematical equation that tells how much output a firm can produce with given amounts of the inputs
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production technologies
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alternative methods of combining inputs to produce output
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revenue
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income from selling a firm's product; defined as price times quantity sold
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short run
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period of time during which at least one or more of the firm's inputs is fixed
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short-run average cost (SRAC) curve
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the average total cost curve in the short term; shows the total of the average fixed costs and the average variable costs
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total cost
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the sum of fixed and variable costs of production
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total product
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synonym for a firm's output
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variable cost
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cost of production that increases with the quantity produced; the cost of the variable inputs
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variable inputs
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factors of production that a firm can easily increase or decrease in a short period of time
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