Lecture Notes Chapter 9: Businesses and the Costs of Production

Economic Costs

Payments a firm must make or incomes it must provide to attract resources away from their best alternative production opportunities; include explicit and implicit costs.

Explicit Costs

Payments to non-owners for resources they supply, such as wages and materials.

Implicit Costs

The money payments that self-employed resources could have earned in their best alternative employments.

Normal Profits

Considered an implicit cost; the minimum payments required to keep the owner's entrepreneurial abilities self-employed.

Economic Profit

Total revenue less all costs (both explicit and implicit including a normal profit).

Short Run

A time period too brief for a firm to alter its plant capacity; plant size is fixed.

Long Run

A period of time long enough for a firm to change the quantities of all resources employed, including plant size.

Law of Diminishing Returns

As successive units of a variable resource are added to a fixed resource, beyond a certain point, total output will decline.

Total Product (TP)

The total quantity or total output of a particular good or service produced.

Marginal Product (MP)

The change in total output resulting from each additional input of labor.

Average Product (AP)

The total product divided by the total number of workers.

Fixed Costs

Costs that do not vary with changes in short-run output.

Variable Costs

Costs that change with the level of output, including labor and materials.

Average Fixed Cost (AFC)

Total fixed cost divided by the level of output.

Average Variable Cost (AVC)

Total variable cost divided by the level of output.

Average Total Cost (ATC)

Total cost divided by the level of output; also equals AFC + AVC.

Marginal Cost (MC)

The additional cost of producing one more unit of output.

Economies of Scale

The cost advantages that firms experience as their output expands.

Diseconomies of Scale

The increase in per unit costs as a firm becomes too large.

Minimum Efficient Scale (MES)

The smallest level of output at which a firm can minimize its average costs in the long run.

Constant Returns to Scale

When average total cost is constant as output changes.

3-D Printing

A technology that allows for the creation of objects using computer-controlled devices, promising low costs and customization.