AP Micro Unit 3 Vocab

Accounting Costs

 The explicit costs of a business, which include all actual expenses incurred, such as wages, rent, and materials. These costs are recorded in the financial statements.

Accounting Profit

 The difference between total revenue and accounting costs. It is the profit calculated based on the explicit costs of running a business, often reported on financial statements.

Economic Costs

The total cost of a business, including both explicit costs (accounting costs) and implicit costs (opportunity costs). It reflects the value of all resources used in production.

Economic Profit

 The difference between total revenue and economic costs. It considers both explicit and implicit costs, providing a more comprehensive view of profitability than accounting profit.

Marginal Cost of Labor

The additional cost incurred by hiring one more unit of labor (e.g., one more worker). It reflects the change in total cost that results from this increase in labor.

Law of Diminishing Marginal Returns (DMR)

A principle stating that as more units of a variable input (like labor) are added to a fixed input (like capital), the additional output produced from each additional unit of input will eventually decrease.

Profit

The financial gain from a business activity, calculated as total revenue minus total costs. It can be positive (profit) or negative (loss).

Short Run

A period in which at least one factor of production is fixed. Businesses can vary their output by changing variable inputs, but they cannot change fixed inputs in the short run.

Long Run

A period in which all factors of production can be varied. In the long run, businesses can adjust all inputs to optimize production and adapt to market conditions.

Total Costs (TC)

The sum of all costs incurred in production, including both fixed and variable costs. TC = FC + VC.

Fixed Costs (FC)

Costs that do not change with the level of output. These are incurred regardless of production levels, such as rent and salaries of permanent staff.

Variable Costs (VC)

Costs that vary directly with the level of output. These costs increase as production increases and decrease as production decreases, such as raw materials and hourly wages.

Marginal Revenue

The additional revenue generated from selling one more unit of a product. It is calculated by the change in total revenue that results from an increase in sales.

Returns to Scale

 A concept that describes how output changes as all inputs are varied in the long run. It can show increasing, constant, or decreasing returns to scale.

Economies of Scale

The cost advantages that a business obtains due to the scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units.

Diseconomies of Scale

The situation where, as a company grows, the per-unit costs increase due to factors like inefficiencies, communication breakdowns, or overburdened management structures.