| A | B |
|---|
| The Firm | An organization that employs factors of production to produce a good or service that it hopes to profitably sell. |
| Accounting Profit | The difference between total revenue and total explicit cost. |
| Economic Profit | The difference between total revenue and total production cost, including the implicit costs. |
| Explicit Costs | Direct costs paid to resource suppliers outside the firm. |
| Implicit Costs | Indirect, nonpurchased, or opportunity costs of resources provided by the entrepreneur. |
| Short Run | A period of time too short to change the size of the plant, but many other more variable resources can be adjusted to meet demand. |
| Long Run | A period of time long enough for the firm to alter all production inputs, including the plant size. |
| Production Function | The mechanism for combining production resources, with existing technology into finished goods and services |
| Fixed Inputs | Production inputs that cannot be changed in the short run. |
| Variable Inputs | Production inputs the firm can adjust in the short run to meet changes in demand for its output |
| Total Product of Labor | The total quantity of output produced for a given quantity of labor employed |
| Marginal Product of Labor | The change in total product resulting from a change in the labor input |
| Average Product of Labor | Total product divided by the labor employed |
| Law of Diminishing Marginal Returns | As successive units of a variable resource are added to a fixed resource, beyond some point the marginal product will decline |
| Total Fixed Costs | Production costs that do not vary with the level of output |
| Total Variable Costs | Production costs that change with the level of output |
| Total Costs | The sum of total fixed and total variable costs at any level of output |
| Marginal Costs | The additional cost of producing one more unit of output |
| Average Fixed Costs | Total fixed costs divided by the level of output |
| Average Variable Costs | Total variable cost divided by the level of output |
| Average Total Cost | Total cost divided by the level of output |
| Sunk Cost | A cost that has already been incurred and is not recoverable |
| Marginal Cost versus Marginal Product of Labor | If labor is the variable input being paid a fixed wage, MC and MPl are inverses of each other. |
| Average Product of Labor versus Average Variable Cost | If labor is the variable input being paid a fixed wage, AVC and APl are inverses of each other |
| Economies of Scale | The downward part of the long-run average total cost curve where LRATC falls as plant size increases |
| Constant Returns of Scale | The horizontal range of long-run average total cost where LRATC is constant over a variety of plant sizes |
| Diseconomies of Scale | The upward part of the long-run average total cost curve where LRATC rises as plant size increases |
| Perfect Competition | The most competitive market structure is characterized by many small price taking firms producing a standardized product in an industry in which there are no barriers to entry or exit |
| Profit Maximizing Rule | All firms maximize profit by producing where marginal revenue equals marginal cost |
| Break Even Point | The output where average total cost is minimized and economic profit is zero |
| Shutdown Point | The output where profit maximizing price equals average variable cost |
| Long Run Equilibrium | There is no more incentive for firms to enter or exit. |
| Normal Profit | The opportunity cost of the entrepreneur's talents; another way of saying the firm is earning zero economic profit |
| Excise Tax | This tax increases the marginal cost, average variable cost, and average total cost |
| Lump Sum Tax | This tax will increase average fixed cost and average total cost but not average variable cost or marginal cost |
| Constant Costs Industry | Entry of new firms does not shift the cost curves of firms in the industry |
| Increasing Costs Industry | Entry of new firms shifts the cost curves for all firms upward |
| Decreasing Costs Industry | Entry of new firms shifts the cost curves for all firms downward |
