Vocabulary |
Total Revenue |
the amount a firm receives from the sale of goods and services |
Total Cost |
the amount a firm spends to produce and/or sell goods and services |
Profit |
the result when total revenue is higher than total cost |
Loss |
the result when total revenue is less than total cost |
Explicit Costs |
tangible out-of-pocket expenses |
implicit costs |
the costs of resources already owned, for which no out-of-pocket payment is made |
Accounting Profit |
profit calculated by subtracting a firm's explicit costs from total revenue |
Economic Profit |
profit calculated by subtracting both the explicit costs and the implicit costs from a firm's total revenue |
Output |
the production the firm creates |
Factors of Production |
the inputs (labor, land, and capital) used in producing goods and services |
Production Function |
the relationship between the inputs a firm uses and the output it creates |
Marginal Product |
the change in output associated with one additional unit of an input |
Diminishing Marginal Product |
condition occurring when successive increases in inputs are associated with a slower rise in output |
Variable Costs |
costs that change with the rate of output |
Fixed Costs |
costs that do not vary with a firm's output in the short run; also known as overhead |
Average Variable Cost (AVC) |
an amount determined by dividing a firm's total variable costs by the output |
Average Fixed Cost (AFC) |
an amount determined by dividing a firm's total fixed costs by the output |
Average Total Cost (ATC) |
the sum of average variable cost and average fixed cost |
Marginal Cost (MC) |
the increase in cost that occurs from producing one additional unit of output |
Scale |
the size of the production process |
Efficient Scale |
the output level that minimizes average total cost in the long run |
Economies of Scale |
condition occurring when long-run average total costs decline as output expands |
Diseconomies of Scale |
condition occurring when long-run average total costs rise as output expands |
Constant Returns to scale (or constant economies of scale) |
condition occurring when long-run average total costs remain constant as output expands |
Equations and relationships |
average fixed costs curve |
will never increase gets closer and closer to zero |
average variable costs curve |
parabola-ish shaped above average fixed costs curve |
average total costs curve |
parabola-ish shaped above average variable costs curve |
marginal costs curve |
parabola-ish shaped above average fixed costs curve and below average variable cost curve and crosses average variable cost curve and average total costs curve at their minimum |
total cost = explicit costs + implicit costs |
profit (or loss) = total revenues - total costs |
accounting profit = total revenue - explicit costs |
economic profit = total revenues - (explicit costs + implicit costs) |
economic profit = accounting profit - implicit costs |
Total costs = total variable costs + total fixed costs |
average variable cost = total variable cost / quantity |
average fixed cost = total fixed cost / quantity |
average total cost = total total cost / quantity |
average total cost = average variable cost + average fixed cost |
marginal cost = change in total variable cost / change in quantity |
marginal cost = change in total cost / change in quantity |
in the long run the average total cost curve for... |
diseconomies of scale increases |
constant returns to scale levels out |
economies of scale decreases |
