ECON 112 Chapter 9 Flashcards

Flashcards covering key vocabulary and concepts from ECON 112 Chapter 9 lecture notes on the theory of production and cost.

Accounting Cost

Includes explicit costs only, which are the money firms pay for factors of production and other inputs.

Explicit Costs

Refer to money that companies/firms pay for factors of production and other inputs.

Economic Costs

Includes both explicit and implicit costs. Provides a more comprehensive view of costs.

Implicit Costs

Opportunity costs that are not reflected in monetary payments.

Total (accounting) Profit

Calculated as TR (Total Revenue) minus Explicit costs. TR > Explicit costs

Normal Profit

The minimum profit that is just covering the firm's costs. TR = TEC (Total Economic Costs).

Economic Profit

Calculated as TR (Total Revenue) minus TEC (Total Economic Costs, Implicit + Explicit). TR > TEC.

Abnormal/Excess/Supernormal Profit

Profit that is greater than Implicit costs plus Explicit costs

Production

The physical transformation of inputs (Factors of Production + intermediate) into outputs.

Production Function (PF)

Relationship between the inputs of a firm and their output at a given period of time, ceteris paribus.

Fixed Inputs

Inputs where the level of usage cannot be changed (e.g., Land, Capital) in the short run.

Variable Inputs

Inputs where the level of usage can be changed (e.g., Labor services, Raw materials).

Average Product (AP)

The average units produced per unit of the variable input. (TP/N)

Marginal Product (MP)

The number of additional units produced per additional unit of the variable input. ∆TP/∆N

Law of Diminishing Marginal Returns

States that when more of a variable input is combined with one or more fixed inputs, eventually the marginal product, then the average product, and finally the total product start to decline.

Fixed Cost

A cost that remains constant irrespective of the quantity of output produced. Also called overheads (e.g., rent).

Variable Cost

A cost that changes when total product changes. Also called direct costs (e.g., some labor costs).

Total Cost (TC)

Total fixed cost + Total variable cost.

Average Cost (AC)

Average fixed cost + Average variable cost.

Marginal Cost (MC)

The increase in total cost when one additional unit of output is produced.