Economics Chapter 7: Production, Costs, and Industry Structure

Accounting Profit

Total revenue minus explicit costs, including depreciation

Average Profit

Profit divided by the quantity of output produced; also known as profit margin

Average Total Cost

Total cost divided by the quantity of output

Average Variable Cost

Variable cost divided by the quantity of output 

Constant Returns to Scale

Expanding all inputs proportionately does not change the average cost of production 

Diminishing Marginal Productivity

General rule that as a firm employs more labor, eventually the amount of additional output produced declines

Diseconomies of scale

The long-run average cost of producing output increases at total output increases

Economic Profit

Total revenue minus total costs (explicit plus implicit)

Economies of Scale

The long-run average cost of producing output decreases as total output increases

Explicit Costs

Out-of pocket costs for a firm, for example, payments for wages and salaries, rent, or materials

Factors Payments

What the firm pays for the use of the factors of production 

Factors of Production (or inputs)

Resources that firms use to produce their products, for example, labor and capital

Firm

An organization that combines inputs of labor, capital, land, and raw or finished component materials to produce outputs 

Fixed Cost

Cost of the fixed inputs; expenditure that a firm must make before production starts and that does not change regardless of the production level

Fixed Inputs

Factors of production that can’t be easily increased or decreased in a short period in time

Implicit Costs

Opportunity cost of resources already owned by the firm and used in business, for example, expanding a factory onto land already owned

Law of Diminishing Marginal Product

The characteristic of production in the short run where each additional worker in an operation has decreasing marginal product

Long Run

The period of time during which all factors are variable

Long-Run Average Cost (LRAC) curve

Shows the lowest possible average cost of production, allowing all the inputs to production to vary so that the firm is choosing its production technology

Marginal Cost

The additional cost of producing one more unit 

Marginal Product

Change in a firm’s output when its employees more labor

Natural Resources (Land and Raw Materials) 

The items used to make the product itself

Private Enterprise

 
The ownership of businesses by private individuals 

Production

The process of combining inputs to produce outputs, ideally of a value greater than the value of the inputs

Production Function

A mathematical expression or equation that explains the engineering relationship between inputs and outputs

Production Technologies 

Alternative methods of combining inputs to produce output

Profit Margin

Another word for average profit

Revenue

The income the firm generates from selling its products, defined as price times quantity sold

Short Run

The period of time during which at least some factors of production are fixed

Short-Run Average Cost (SRAC) curve

The average total cost curve in the short term; shows the total of the average fixed costs and the average variable costs

Total Cost

The sum of fixed and variable costs of production

Total Product

synonym for a firm’s output

Variable Cost

cost of production that increases with the quantity produced; the cost of the variable inputs

Variable Inputs

 
Factors of production that a firm can easily increase or decrease in a short period of time