Business Economics Lecture 4 Notes - Short Run Costs, Revenue, and Profit Maximisation (Vocabulary)

Vocabulary flashcards covering key terms from the lecture on short-run production, costs, revenue concepts, and profit maximisation.

Short-run theory of production

The analysis of production in which at least one input is fixed; firms adjust output by varying other inputs.

Fixed factor

An input whose quantity cannot be changed in the short run.

Variable factor

An input whose quantity can be changed in the short run.

Short run

The time period during which at least one input remains fixed.

Long run

The time period during which all inputs can be varied.

Production function

A mathematical relationship showing maximum output as a function of inputs; expresses how output responds to input changes.

Total Physical Product (TPP)

The total output produced from a given set of inputs; can be represented as TPP = f(K,L).

Diminishing returns

As a fixed factor is augmented with a variable factor, marginal output eventually decreases; after some point, each extra unit of input adds less output.

Total cost (TC)

The sum of total fixed cost and total variable cost; includes opportunity costs.

Total fixed cost (TFC)

The cost of fixed inputs that does not vary with output.

Total variable cost (TVC)

The portion of cost that varies with output level.

Average fixed cost (AFC)

TFC divided by output Q.

Average variable cost (AVC)

TVC divided by output Q.

Average total cost (ATC)

TC divided by output Q.

Marginal cost (MC)

The extra cost incurred by producing one more unit of output.

Long-run average cost (LRAC)

The average cost per unit when all inputs can be varied; shaped by economies and diseconomies of scale.

Economies of scale

When doubling all inputs leads to a greater-than-double increase in output, causing average costs to fall.

Constant returns to scale

When doubling all inputs leads to exactly double output; average cost remains constant.

Diseconomies of scale

When increasing all inputs leads to a less-than-double increase in output, causing average costs to rise.

Returns to scale

The rate at which output changes when all inputs are proportionally varied; includes increasing, constant, and decreasing returns to scale.

Marginal revenue (MR)

The additional revenue earned from selling one more unit of output.

Average revenue (AR)

Revenue per unit sold; equal to price when AR = TR/Q = P.

Total revenue (TR)

The total money received from selling a quantity of output; TR = P × Q.

Profit

Total revenue minus total cost; maximised when TR − TC is greatest.

Profit maximisation

The firm expands output until MR = MC (or TR − TC is maximised).

Shut-down point (short run)

The price level at which the firm covers its variable costs; P = AVC; below this, the firm should shut down in the short run.

Long-run shut-down point

The price level at which the firm covers all costs; P = LRAC; if price falls below, the firm exits in the long run.

Economic profit

Profit accounting for opportunity costs; can be zero even if accounting profit is positive.

Accounting profit

Revenue minus explicit costs; does not include opportunity costs.

MR = MC (profit maximisation rule)

In the short run, probe maximisation occurs where marginal revenue equals marginal cost.

AR = price

Average revenue equals the price of the good; in markets with downward-sloping demand, AR may differ from MR.

MC and the minimum of AVC/ATC

The MC curve passes through the minima of the AVC and ATC curves.