Business and the Costs of Production

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Utility

answer

Ability or capacity of a good or service to be useful and give satisfaction to someone.

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explicit costs

answer

input costs that require an outlay of money by the firm

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implicit costs

answer

Indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur

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accounting profit

answer

total revenue - explicit costs

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economic profit

answer

a firm's total revenue minus its explicit and implicit costs

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normal profit

answer

a profit that allows a business to survive and grow

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short run

answer

one cost must be fixed

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long run

answer

all costs are variable costs

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Total Product (TP)

answer

total output or production by a firm

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marginal product

answer

extra output due to the addition of one more unit of input

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Average Product (AP)

answer

Also called labor productivity, is output per unit of labor input

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law of diminishing returns

answer

the principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline

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fixed costs

answer

costs that remain constant as output changes

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variable costs

answer

costs that vary with the quantity of output produced

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Total Cost (TC)

answer

FC + VC

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Average Fixed Cost (AFC)

answer

FC/Q

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Average Variable Cost (AVC)

answer

VC/Q

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Average Total Cost (ATC)

answer

TC/Q or AFC + AVC

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Marginal Cost (MC)

answer

The additional cost incurred from the consumption of the next unit of a good or service

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economies of scale

answer

the property whereby long-run average total cost falls as the quantity of output increases

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diseconomies of scale

answer

the situation in which a firm's long-run average costs rise as the firm increases output

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constant economies of scale

answer

Occurs when the firms per-unit costs do not change as output changes.

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minimum efficient scale (MES)

answer

the lowest level of output at which a firm can minimize long-run average total cost

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natural monopoly

answer

a market that runs most efficiently when one large firm supplies all of the output

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coordination problem

answer

a situation in which two or more people are all better off if they coordinate on a common course of action, but there is more than one possible course of action to take

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elastic

answer

describes demand that is very sensitive to a change in price

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Inelastic

answer

Describes demand that is not very sensitive to a change in price

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Externality

answer

an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume

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substitutes

answer

two goods for which an increase in the price of one leads to an increase in the demand for the other

question

complements

answer

two goods that are bought and used together hot dogs and hot dog buns

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inferior good

answer

a good that consumers demand less of when their incomes increase

1 of 31

question

Utility

answer

Ability or capacity of a good or service to be useful and give satisfaction to someone.

question

explicit costs

answer

input costs that require an outlay of money by the firm

question

implicit costs

answer

Indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur

question

accounting profit

answer

total revenue - explicit costs

question

economic profit

answer

a firm's total revenue minus its explicit and implicit costs

question

normal profit

answer

a profit that allows a business to survive and grow

question

short run

answer

one cost must be fixed

question

long run

answer

all costs are variable costs

question

Total Product (TP)

answer

total output or production by a firm

question

marginal product

answer

extra output due to the addition of one more unit of input

question

Average Product (AP)

answer

Also called labor productivity, is output per unit of labor input

question

law of diminishing returns

answer

question

fixed costs

answer

costs that remain constant as output changes

question

variable costs

answer

costs that vary with the quantity of output produced

question

Total Cost (TC)

answer

FC + VC

question

Average Fixed Cost (AFC)

answer

FC/Q

question

Average Variable Cost (AVC)

answer

VC/Q

question

Average Total Cost (ATC)

answer

TC/Q or AFC + AVC

question

Marginal Cost (MC)

answer

The additional cost incurred from the consumption of the next unit of a good or service

question

economies of scale

answer

the property whereby long-run average total cost falls as the quantity of output increases

question

diseconomies of scale

answer

the situation in which a firm's long-run average costs rise as the firm increases output

question

constant economies of scale

answer

Occurs when the firms per-unit costs do not change as output changes.

question

minimum efficient scale (MES)

answer

the lowest level of output at which a firm can minimize long-run average total cost

question

natural monopoly

answer

a market that runs most efficiently when one large firm supplies all of the output

question

coordination problem

answer

a situation in which two or more people are all better off if they coordinate on a common course of action, but there is more than one possible course of action to take

question

elastic

answer

describes demand that is very sensitive to a change in price

question

Inelastic

answer

Describes demand that is not very sensitive to a change in price

question

Externality

answer

an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume

question

substitutes

answer

two goods for which an increase in the price of one leads to an increase in the demand for the other

question

complements

answer

two goods that are bought and used together hot dogs and hot dog buns

question

inferior good

answer

a good that consumers demand less of when their incomes increase

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Business and the Costs of Production

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