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
