Businesses and the Costs of Production

Flashcards covering key concepts related to economic costs, production costs, and principles of production.

Economic Cost

The payment that must be made to obtain and retain the services of a resource.

Explicit Costs

Monetary outlay.

Implicit Costs

Opportunity cost of using self-owned resources, including a normal profit.

Accounting Profit

Revenue minus explicit costs.

Economic Profit

Accounting profit minus implicit costs.

Fixed Costs

Costs that do not vary with output.

Variable Costs

Costs that do vary with output.

Short Run

Period when some inputs are variable while others are fixed.

Long Run

Period when all inputs are variable and firms can adjust their plant size.

Law of Diminishing Returns

Principle stating that adding more variable resources to fixed resources will eventually yield lower per-unit returns.

Marginal Product (MP)

Change in total product divided by change in labor input.

Average Product (AP)

Total product divided by the number of units of labor.

Minimum Efficient Scale (MES)

Lowest level of output at which long-run average costs are minimized.

Economies of Scale

Cost advantages that firms experience as they increase their outputs.

Diseconomies of Scale

Increased per-unit costs that result from an increase in the scale of production beyond a certain point.