Key Terms

accounting profit: total revenues minus explicit costs, including depreciation

average profit: profit divided by the quantity of output produced; also known as profit margin

average total cost: total cost divided by the quantity of output

average variable cost: variable cost divided by the quantity of output

constant returns to scale: expanding all inputs proportionately does not change the average cost of production

diminishing marginal productivity: general rule that as a firm employs more labor, eventually the amount of additional output produced declines

diseconomies of scale: the long-run average cost of producing output increases as total output increases

economic profit: total revenues minus total costs (explicit plus implicit costs)

economies of scale: the long-run average cost of producing output decreases as total output increases

economies of scale: the long-run average cost of producing output decreases as total output increases

explicit costs: out-of-pocket costs for a firm, for example, payments for wages and salaries, rent, or materials

factors of production (or inputs): resources that firms use to produce their products, for example, labor and capital

firm: an organization that combines inputs of labor, capital, land, and raw or finished component materials to produce outputs.

fixed cost: cost of the fixed inputs; expenditure that a firm must make before production starts and that does not change regardless of the production level

fixed inputs: factors of production that can’t be easily increased or decreased in a short period of time

implicit costs: opportunity cost of resources already owned by the firm and used in business, for example, expanding a factory onto land already owned

long run: period of time during which all of a firm’s inputs are variable

long-run average cost (LRAC) curve: 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

marginal cost: the additional cost of producing one more unit; mathematically, MC=ΔTC/ΔL

marginal product: change in a firm’s output when it employees more labor; mathematically, MP=ΔTP/ΔL

private enterprise: the ownership of businesses by private individuals

production: the process of combining inputs to produce outputs, ideally of a value greater than the value of the inputs

production function: mathematical equation that tells how much output a firm can produce with given amounts of the inputs

production technologies: alternative methods of combining inputs to produce output

revenue: income from selling a firm’s product; defined as price times quantity sold

short run: period of time during which at least one or more of the firm’s inputs is fixed

short-run average cost (SRAC) curve: the average total cost curve in the short term; shows the total of the average fixed costs and the average variable costs

total cost: the sum of fixed and variable costs of production

total product: synonym for a firm’s output

variable cost: cost of production that increases with the quantity produced; the cost of the variable inputs

variable inputs: factors of production that a firm can easily increase or decrease in a short period of time

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