Production Concepts and Cost Structures in Firms

Business Firm

Entity employing resources to produce goods/services.

Invisible Hand

Market forces guiding individual actions without direction.

Visible Hand

Managerial direction in a firm's production process.

Market Coordination

Individuals perform tasks adjust production based on changes in market forces.

Managerial Coordination

Managers direct employees to complete certain tasks.

Shirking

Workers exert less effort than agreed upon.

Monitor

Manager reducing shirking by overseeing employees.

Residual Claimant

Individual who shares in the firm's profits.

Explicit Cost

Actual monetary payments for resources used.

Implicit Cost

Value of resources without monetary payment.

Accounting Profit

Total revenue minus explicit costs.

Economic Profit

Total revenue minus total costs (explicit and implicit).

Normal Profit

Zero economic profit; covers opportunity costs.

Production

Transformation of resources or inputs into goods/services.

Fixed Input

input whose quantity cannot be changed as output changes

Variable Input

input whose quantity can be changed as output changes.

Marginal Physical Product (MPP)

Change in output from one additional variable input.

Law of Diminishing Marginal Returns

Increasing variable input eventually reduces MPP.

Sunk Cost

Past cost unchangeable by current decisions.