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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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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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Perfect Competition
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competition—many firms are all trying to sell identical products
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Monopoly
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only one firm is selling the product, and this firm faces no competition
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monopolistic competition
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many firms selling similar, but not identical products
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Oligopoly
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few firms that sell identical or similar products
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Total Revenue
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Price x Quantity sold
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Profit
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Total Revenue - Total Cost
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Explicit Costs
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out-of-pocket costs; actual payments.
Wages, rent, etc
Wages, rent, etc
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Implicit Costs
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the opportunity cost of using resources that the firm already owns.
Depreciation of goods, materials, and equipment
Depreciation of goods, materials, and equipment
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Accounting Profit
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Total Revenue - Explicit Costs
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Economic Profit
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Total Revenue - Total Cost
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Total Cost
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Explicit Cost + Implicit Cost
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Factors of Production (inputs)
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resources that firms use to produce their products (Natural Resources, Labor, Capital, Technology, Entrepreneurship)
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Production Function
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Q = f [NR,L, K,t, E]
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Fixed Inputs (K)
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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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Variable Inputs (L)
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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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Short Run
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period of time during which at least some factors of production are fixed
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Long Run
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period of time during which all factors are variable
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Marginal Product (MP)
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the additional output of one more worker ΔTP / ΔL
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law of 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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Total Product Curve
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what the firm pays for the use of the factors of production (Raw materials prices, Rent, Wages and salaries, Interest and dividends, Profit )
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Marginal Product Curve
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costs of the variable inputs, like labor
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Factor Payments
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costs of the fixed inputs, like rent
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Variable Costs
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TC/Q
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Fixed Costs
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ΔTC/ΔQ
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Average Total Cost (ATC)
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VC/Q
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Marginal Cost (MC)
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Price - Average Cost
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Average Variable Cost (AVC)
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market price > average cost
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Average Profit
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price is < average cost
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Positive Average Profit
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when expanding all inputs proportionately does not change the average cost of production
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Negative Average Profit
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the long-run average cost of producing each individual unit increases as total output increases
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Long-run Average Cost (LRAC) Curve
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the property whereby long-run average total cost falls as the quantity of output increases
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short-run average cost (SRAC) curve
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Constant Returns to Scale
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diseconomies of scale
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Economies of scale
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