chapter 9: production costs

economic costs

the costs associated with the use of resources; the sum of explicit and implicit costs

explicit costs

monetary payments made by individuals, firms, and governments for the use of land, labor, capital, and entrepreneurial ability owned by others. aka accounting costs

implicit costs

the opportunity costs of using owned resources; costs for which no monetary payment is explicitly made

accounting profit

total revenue minus the explicit costs of production

economic profit

total revenue minus economic costs, which include both explicit and implicit costs of production

total product (tp)

the total amount of output produced with a given amount of resources

marginal product (mp)

the additional output produced as a result of utilizing one more unit of a variable resource (i.e., labor or capital)

average product (ap)

the average amount of output produced per unit of a resource employed; total product divided by the number of units a resource employed.

increasing marginal returns

a characteristic of production whereby the marginal product of the next unit of a variable resource utilized is greater than that of the previous variable resource

diminishing marginal returns

a characteristic of production whereby the marginal product of the next unit of a variable resource utilized is less than that of the previous variable resource.

fixed costs

costs that do not change with the amount of output produced

variable costs

costs that change with the amount of output produced, increasing as production increases and decreasing as production decreases

total cost (tc)

the sum of fixed and variable costs of production

average fixed cost (afc)

total fixed cost (tfc) divided by the amount of output produced; fixed cost per unit

average variable cost (avc)

total variable cost (tvc) divided by the amount of output produced; variable cost per unit

average total cost (atc)

total cost (tc) divided by the amount of output produced; total cost per unit

marginal cost (mc)

the additional cost associated with one more unit of an activity. for production, it is the change in total cost due to the production of one more unit of output

long run average total cost curve (lratc)

a curve showing the lowest average total cost possible for any given level of output when all inputs of production are variable