ch8: production and costs (test2)

Business Firm

An entity that employs factors of production (resources) to
produce goods and services to be sold to consumers, other firms, or the
government.

Market Coordination

process by which a market economy organizes and manages economic activity to satisfy consumer needs and wants. Rather than a single central authority, the coordination is done by the "invisible hand" of millions of individual buyers and sellers making their own decisions. 

Managerial Coordination

The process in which managers direct employees to perform certain tasks.

Shirking

The behavior of a worker who is putting forth less than the agreed-
to effort.

Residual Claimant

a person or group that receives the leftover money or assets from a business or project only after all other stakeholders, such as lenders and employees, have been paid

Two sides to every business firm…

revenue and cost
− Both sides can be seen by focusing on profit

Profit

The difference between total revenue and total cost
▪ Profit = TR - TC

Total revenue (TR) is equal to the price of a good multiplied by the quantity of the good sold.

TR = P x Q

Total Cost = explicit costs + implicit costs: T/F

True

Explicit Cost

Money you physically spend, like paying rent, wages, or buying supplies. (A cost you actually pay money for)

Implicit Cost

Value you give up even though no money is spent.
Example: Using your own time, or running your business in a building you could have rented out.

explicit and implicit costs in simple terms..

Explicit = cash out of pocket.
Implicit = hidden cost of what you give up.

Accounting Profit: The difference between total revenue and explicit costs

Accounting Profit = TR – TC (explicit costs

Economic Profit: The difference between total revenue and total cost,
including both explicit and implicit costs

Economic Profit = Total Revenue – (Explicit Costs + Implicit Costs).

Economic Profit

What’s left after subtracting all costs — both money you spend (explicit costs) and what you give up (implicit costs) — from your total revenue.

Normal Profit

Normal Profit = Zero Economic Profit
− The level of profit necessary to keep
resources employed in a firm
− A firm that earns normal profit is earning
revenue equal to its total costs
▪ TR = TC (explicit costs plus implicit
costs)

Fixed Input

Something a business uses that DOES NOT CHANGE in the short run, no matter how much is produced.

Example: A factory building or pizza oven — you pay for it whether you make 10 pizzas or 1,000.)

Variable Input

Something a business uses that DOES CHANGE with production — the more you make, the more you need.

Example: Ingredients for pizzas (cheese, dough, sauce) or worker hours — if you make more pizzas, you need more of them.

Short Run

A time when a business can change some things (like workers or materials) but can’t change everything (like its building or machines)- some things are fixed

Long run

A time when a business can change all its inputs, including buildings, machines, and workers — nothing is fixed

Marginal Physical Product (MPP)

How much extra stuff you make when you add one more unit of a variable input (like one more worker), while keeping everything else the same.

Law of Diminishing Marginal Returns

If you keep adding more of something that can change (like workers) to something that’s fixed (like machines or space), each extra worker will eventually add less and less output.

Example: In a small kitchen, the first few cooks make food faster, but if you keep adding more cooks, they start getting in each other’s way, and each new cook adds less to the total food made.

Fixed costs

Costs you pay no matter how much you produce.

Example: Rent for a building or monthly insurance — you pay it whether you make nothing or a lot.

Variable Costs

Costs that go up or down depending on how much you produce.

Example: Ingredients, electricity, or wages for extra hours — the more you make, the more you pay.

Total Costs (TC)

The sum of fixed costs and variable costs
▪ TC = FC + VC

Marginal Cost (MC)

cost of producing an additional amount of output 

Formula: MC = Change in Total Cost ÷ Change in Quantity (MC = ΔTC / ΔQ)

what does a input refer to?

any resource or factor of production used to create goods or services (the output)