Chapter 6: Businesses and Their Costs

Flashcards covering key terms and concepts related to businesses and their costs.

Plant

Factory, farm, mine, store, website, or warehouse where production occurs.

Firm

An organization that operates one or more plants.

Industry

A group of firms that produce the same products.

Stocks

Ownership shares of a corporation.

Bonds

Liabilities of a corporation.

Limited liability

A legal structure that limits an owner's personal liability for debts.

Principal-Agent Problem

A situation where stockholders (principals) rely on executives (agents) to run the company.

Explicit costs

Monetary payments made for resources.

Implicit costs

The value of the next best alternative use of self-owned resources, including normal profit.

Economic Costs

The total payment required to obtain and retain services of a resource; includes explicit and implicit costs.

Accounting profit

Total revenue minus explicit costs.

Economic profit

Accounting profit minus implicit costs.

Short run

A period in which some factors of production are fixed.

Long run

A period in which all inputs can be varied.

Marginal Product (MP)

The change in total product resulting from a one-unit change in labor input.

Law of Diminishing Returns

The principle stating that adding more of a variable input to a fixed input will eventually yield lower per-unit returns.

Fixed costs (TFC)

Costs that do not vary with output.

Variable costs (TVC)

Costs that vary directly with output.

Total costs (TC)

The sum of fixed and variable costs (TC = TFC + TVC).

Average Fixed Cost (AFC)

The fixed cost per unit of output (AFC = TFC/Q).

Average Variable Cost (AVC)

The variable cost per unit of output (AVC = TVC/Q).

Marginal Cost (MC)

The increase in total cost resulting from producing one more unit (MC = ΔTC/ΔQ).

Economies of Scale

Cost advantages that firms obtain due to their scale of operation, with cost per unit of output generally decreasing with increasing scale.

Diseconomies of Scale

Cost disadvantages that firms may experience when they become too large, leading to increased per-unit costs.

Minimum Efficient Scale (MES)

The lowest level of output at which a firm can minimize long-run average costs.