CH: 7 Production and Costs
Firm
An economic institution that transforms resources (Factors of Production) into outputs.
Total Revenue
Equal to price per unit times quantity sold.
Profit
Equal to the difference between total revenue and total cost.
Average Total Cost (ATC)
Equal to total cost divided by output (TC/Q). (ATC)= total cost / quantity
Accounting Costs
Includes only explicit (out-of-pocket) costs.
Marginal Product
The change in output that results from a change in labor. (Q/L)
Marginal Cost (MC)
The change in total costs arising from the production of additional units of output. Because fixed costs do not change with output, marginal costs are the change in variable costs associated with additional production. (MC)= change in total cost from producing one more unit
Corporation
A business structure that has most of the legal rights of individuals, and in addition, can issue stock to raise capital. Stockholders liability is limited to the value of their stock.
Increasing Marginal Returns
A new worker hired adds more to total output than the previous worker hired, so that both average and marginal products are rising.
Long Run (LR)
A period long enough that firms can vary all factors, as well as leave and enter industries.
Short Run (SR)
A period of time during which at least one factor of production is fixed.
Diseconomies of Scale
A range of output where average total costs tend to increase. Firms often become so big that management becomes bureaucratic and unable to control its operations efficiently.
Sole Proprietorship
A type of business structure composed of single owner who supervises and manages the business and is subject to unlimited liability.
Long Run Average Toatal Cost (LRATC)
In the long run, firms can adjust their plant sizes so that (LRATC) is the lowest unit cost at which any particular output can be produced in the long run.
Total Cost (TC)
The sum of all costs to run a business. To an economist, this includes out-of-pocket expenses and opportunity costs. (TC)= fixed cost + variable cost
Law of Diminishing Returns
An additional worker adds to total output, but at a diminishing rate.
Productivity
An economic measure of output per unit of input.
Fixed Cost
Costs that do not change as a firm's output expands or contracts, often called overhead. These include items such as lease payments, administrative expenses, property taxes, and insurance premiums.
Variable Costs (VC)
Costs that vary output fluctuations, including expenses such as labor and material costs.
Constant Returns to Scale
A range of output where average total costs are relatively constant. The expansion of fast-food restaurant franchises and movie theatres, which are essentially replications of existing franchises and theatres, reflect this.
Average Fix Cost (AFC)
Equal to total fixed cost divided by output. (AFC)= fixed cost / quantity
Average Variable Cost (AVC)
Equal to total variable cost divided by output (AVC)= fixed cost / quantity
Partnership
Similar to a sole proprietorship, but involves more than one owner who share the management of the business. Partnerships are also subject to unlimited liability.
Implicit Cost
The opportunity costs of using resources that belong to the firm, including depreciation, depletion of business assets, and the opportunity cost of the firm's capital employed in the business.
Production
The process of turning inputs into outputs.
Sunk Cost
Those costs that have been incurred and cannot be recovered. For example funds spent on existing technology that has become obsolete and past advertising that has run in the media.
Explicit Cost
Those expenses paid directly to another economic entity, including wages, lease payments, taxes and utilities
Total Product (Output)
Total product is the overall quantity of output that a firm produces, usually specified in relation to a variable input.
Economies of Scale
As a firm's output increases, its (LRATC) tends to decline. This results from specialization of labor and management, and potentially a better use of capital and complimentary production techniques.
Economic Cost
Includes explicit (out-of-pocket) and implicit (opportunity) costs.