| Term | Definition |
|---|---|
| average product | The output per unit of input, calculated by dividing total product by the quantity of input used. |
| cost | The monetary expense incurred in producing goods and services, including both fixed and variable expenses. |
| diminishing marginal returns | The principle that as a firm employs more of one variable input while holding other inputs constant, the marginal product of that input eventually decreases. |
| long run | A time period in which all factors of production are variable, allowing firms to enter or exit markets and adjust all inputs. |
| long-run costs | Production costs in the period when all factors of production are variable and can be adjusted. |
| marginal product | The additional output produced by employing one more unit of a variable input, holding all other inputs constant. |
| outputs | The goods or services produced by a firm using inputs. |
| production | The process of creating goods and services using inputs such as labor, capital, and raw materials. |
| production function | The relationship between the quantities of inputs used by a firm and the quantity of output produced, showing how output changes with different input levels in both the short run and long run. |
| productivity | The output produced per unit of factor input, which influences a firm's decision to hire factors of production. |
| scarce resources | Productive inputs and materials that are limited in supply relative to the demand for them, requiring allocation decisions. |
| short run | A time period in which at least one factor of production is fixed, and firms can only adjust variable inputs to change output levels. |
| short-run costs | Production costs in the period when at least one factor of production is fixed, including both fixed and variable costs. |
| total product | The total quantity of output produced by a firm at different levels of input usage. |
| Term | Definition |
|---|---|
| average fixed cost | Total fixed costs divided by the quantity of output produced. |
| average total cost | The total cost of production divided by the quantity of output produced. |
| average variable cost | The total variable cost divided by the quantity of output produced; used to determine whether a firm should operate or shut down in the short run. |
| cost | The monetary expense incurred in producing goods and services, including both fixed and variable expenses. |
| diminishing marginal returns | The principle that as a firm employs more of one variable input while holding other inputs constant, the marginal product of that input eventually decreases. |
| division of labor | The separation of production tasks among workers, where each worker specializes in specific tasks to increase productivity. |
| fixed costs | Costs that do not change regardless of the level of output produced, such as rent or equipment purchases. |
| input costs | The expenses associated with acquiring factors of production such as labor, materials, and capital. |
| long run | A time period in which all factors of production are variable, allowing firms to enter or exit markets and adjust all inputs. |
| long-run costs | Production costs in the period when all factors of production are variable and can be adjusted. |
| marginal costs | The additional cost incurred from producing one more unit of output. |
| production | The process of creating goods and services using inputs such as labor, capital, and raw materials. |
| production function | The relationship between the quantities of inputs used by a firm and the quantity of output produced, showing how output changes with different input levels in both the short run and long run. |
| productivity | The output produced per unit of factor input, which influences a firm's decision to hire factors of production. |
| short run | A time period in which at least one factor of production is fixed, and firms can only adjust variable inputs to change output levels. |
| short-run costs | Production costs in the period when at least one factor of production is fixed, including both fixed and variable costs. |
| specialization | The concentration of productive effort on a limited number of goods or services in which a producer has comparative advantage. |
| total cost | The sum of all fixed costs and variable costs at a given level of output. |
| total variable cost | The sum of all costs that vary with the level of output produced in the short run. |
| variable costs | Costs that change with the level of output produced; in the long run, all costs are variable because firms can adjust all inputs. |
| Term | Definition |
|---|---|
| constant returns to scale | A situation where output increases by the same percentage as the increase in inputs, resulting in constant average costs. |
| cost | The monetary expense incurred in producing goods and services, including both fixed and variable expenses. |
| decreasing returns to scale | A situation where output increases by a smaller percentage than the increase in inputs, resulting in higher average costs as production expands. |
| diseconomies of scale | A situation where long-run average total costs increase as a firm increases its scale of production. |
| economies of scale | The cost advantages that a firm experiences as it increases production, resulting in lower average costs per unit. |
| increasing returns to scale | A situation where output increases by a larger percentage than the increase in inputs, resulting in lower average costs as production expands. |
| long run | A time period in which all factors of production are variable, allowing firms to enter or exit markets and adjust all inputs. |
| long-run average total cost | The average cost per unit of output when a firm can adjust all inputs; it reflects the firm's cost structure across different scales of production. |
| long-run costs | Production costs in the period when all factors of production are variable and can be adjusted. |
| market concentration | The degree to which a small number of firms control a large share of production in a market, influenced by the minimum efficient scale. |
| market structure | The organizational characteristics of a market, including the number and size of firms, determined partly by the minimum efficient scale. |
| minimum efficient scale | The smallest level of output at which a firm can minimize its long-run average total costs; plays a role in determining market structure and firm concentration. |
| production | The process of creating goods and services using inputs such as labor, capital, and raw materials. |
| productivity | The output produced per unit of factor input, which influences a firm's decision to hire factors of production. |
| scale of production | The relationship between the quantity of inputs used and the quantity of output produced by a firm. |
| scarce resources | Productive inputs and materials that are limited in supply relative to the demand for them, requiring allocation decisions. |
| short run | A time period in which at least one factor of production is fixed, and firms can only adjust variable inputs to change output levels. |
| short-run costs | Production costs in the period when at least one factor of production is fixed, including both fixed and variable costs. |
| variable costs | Costs that change with the level of output produced; in the long run, all costs are variable because firms can adjust all inputs. |
| Term | Definition |
|---|---|
| accounting profit | The difference between total revenue and explicit costs only, without accounting for implicit costs or opportunity costs. |
| economic profit | The difference between total revenue and total economic cost, including both explicit and implicit costs. |
| implicit costs | Opportunity costs of using resources owned by the firm that do not involve direct monetary payments, such as the cost of financial capital, compensation for risk, or an entrepreneur's time. |
| marginal benefits | The additional benefit or satisfaction gained from consuming or producing one more unit of a good. |
| marginal costs | The additional cost incurred from producing one more unit of output. |
| normal profit | The level of profit earned when all implicit costs are fully compensated, resulting in zero economic profit. |
| profit | The difference between total revenue and total cost, representing the financial gain or loss from economic activity. |
| Term | Definition |
|---|---|
| marginal benefits | The additional benefit or satisfaction gained from consuming or producing one more unit of a good. |
| marginal costs | The additional cost incurred from producing one more unit of output. |
| marginal revenue | The additional revenue a firm receives from selling one more unit of output. |
| profit-maximizing level of production | The quantity of output a firm produces where the difference between total revenue and total cost is greatest, determined by comparing marginal revenue and marginal cost. |
| profit-maximizing rule | The principle that firms maximize profits by producing at the output level where marginal revenue equals marginal cost. |
| Term | Definition |
|---|---|
| average variable cost | The total variable cost divided by the quantity of output produced; used to determine whether a firm should operate or shut down in the short run. |
| barriers to entry | Obstacles that prevent new firms from entering a market, allowing existing firms to maintain market power. |
| barriers to exit | Obstacles that prevent firms from leaving a market, such as long-term contracts or sunk costs. |
| economic losses | A situation where a firm's total revenue is less than its total economic cost, resulting in negative economic profit. |
| long run | A time period in which all factors of production are variable, allowing firms to enter or exit markets and adjust all inputs. |
| profit-making opportunities | Situations in which firms can earn economic profits by entering a market or continuing operations. |
| short run | A time period in which at least one factor of production is fixed, and firms can only adjust variable inputs to change output levels. |
| shut down | A short-run decision by a firm to produce zero output when price falls below average variable cost. |
| total revenue | The total income a firm receives from selling its goods or services, calculated as price multiplied by quantity sold. |
| total variable cost | The sum of all costs that vary with the level of output produced in the short run. |
| Term | Definition |
|---|---|
| allocative efficiency | An economic outcome where price equals marginal cost and resources are allocated to their highest-valued uses. |
| average total cost | The total cost of production divided by the quantity of output produced. |
| barriers to entry | Obstacles that prevent new firms from entering a market, allowing existing firms to maintain market power. |
| constant cost industry | An industry where long-run average costs remain unchanged as industry output expands or contracts. |
| decreasing cost industry | An industry where long-run average costs fall as industry output expands due to economies of scale or decreased input prices. |
| economic losses | A situation where a firm's total revenue is less than its total economic cost, resulting in negative economic profit. |
| economic profit | The difference between total revenue and total economic cost, including both explicit and implicit costs. |
| efficiency | A market outcome where resources are allocated to maximize total surplus and no mutually beneficial trades remain unexploited. |
| efficient outcomes | Market results where resources are allocated such that no one can be made better off without making someone else worse off, maximizing total surplus. |
| equilibrium | The market condition where the quantity supplied equals the quantity demanded, resulting in a stable price with no tendency to change. |
| firm decision making | The process by which firms determine production levels and pricing strategies to maximize profit or minimize losses. |
| firm entry | The process by which new firms begin operations in a market, typically in response to economic profits. |
| firm exit | The process by which existing firms leave a market, typically in response to economic losses. |
| increasing cost industry | An industry where long-run average costs rise as industry output expands due to increased input prices. |
| long-run competitive equilibrium | A market condition where firms earn zero economic profit, price equals marginal cost and minimum average total cost, and no incentive exists for entry or exit. |
| marginal benefits | The additional benefit or satisfaction gained from consuming or producing one more unit of a good. |
| marginal costs | The additional cost incurred from producing one more unit of output. |
| marginal revenue | The additional revenue a firm receives from selling one more unit of output. |
| market power | The ability of a firm to influence the price of a product by changing the quantity it supplies. |
| perfectly competitive markets | Markets characterized by many buyers and sellers, homogeneous products, free entry and exit, and perfect information where individual firms are price takers. |
| price taker | A firm that cannot influence the market price and must accept the price determined by market supply and demand. |
| productive efficiency | An outcome where firms produce at the lowest possible average total cost, minimizing waste and maximizing output from available resources. |
| profit maximization | The process of determining the output level where the difference between total revenue and total cost is greatest. |
| short-run competitive equilibrium | A market condition where firms produce where marginal cost equals marginal revenue, and price may differ from long-run levels, resulting in economic profits or losses. |