Profit Maximization

Accounting profit

Difference between purchase and component costs

Substitution effect

Rational-opportunity cost, price falls, buy more; price rises, buy less

Opportunity set

The set of options that is defined and limited by a budget constraint

Total variable cost

The total of all costs that vary with output in the short run

Investment

Buying capital

Economic profit

Reflects opportunity costs

Short run

The period of time for which two conditions hold: the firm is operating under a fixed factor of production, and firms can neither enter nor exit an industry.

Total economic cost

The total of the out-of-pocket costs, normal rate of return on capital and opportunity cost of each factor of production

Tangible Capital

Things businesses buy that make them more money

Average variable cost

Total variable cost divided by the number of units of output.

deprication

Wear out

Law of diminishing returns

When additional units of a variable input are aded to fixed inputs after a certain point, the marginal product of the variable input declines.

Capital

Any productive asset

Average total cost

Total cost divided by the number of units of output

Normal rate of return

A rate of return on capital that is just sufficient to keep owners and investors satisfied. For relatively risk-free firms, it should be nearly the same as the interest rate on risk-free government bonds.

Normal Profit

A situation where economic profit equals zero.

Firm

An organization that comes into being when a person decides to produce a good or service to meet demand; usually exist to make a profit

Sunk costs

Another name for fixed costs.

Fixed cost

Any cost that does not depend of the firm's level of output. The costs occur even if the firm is not producing anything. No fixed costs in the long run.

Income effect

Emotional-price falls, buy more; price rises, buy less

Total cost

Fixed costs plus variable costs.

Intangible Capital

Human skills and goodwill (reputation)

Variable cost

Production costs

Long run

That period of time for which there are no fixed factors of production: Firms can increase or decrease the scale of operation, and new firms can enter and existing firms can exit the industry.

Marginal product

The additional output that can be produced by adding one more unit of a specific input.

Marginal revenue product

The additional revenue a firm earns by employing one additional unit of input.

Marginal revenue

The additional revenue that a firm takes in when it increases output by one additional unit. (P=MR)

Total revenue

The amount received from the sale of the product (q x P)

Consumer Surplus

The difference between the maximum amount a person is willing to pay for a good and its current market price

Profit

The difference between total revenue and total cost

Marginal cost

The increase in total cost that results from producing one more unit of output. Reflect changes in variable costs.

Budget Constraint

The limits imposed on household choices by income, wealth, and product pricest