7.6 Key Terms
Key Terms
This is a cash concept. It means total revenue minus explicit costs—the difference between dollars brought in and dollars paid out. 7.1
of labour is the total product divided by the quantity of labour. AP=TP/L. 7.2
occur when the average cost of production does not change as output rises. In a typical long-run average cost curve, there are sections of both economies of scale and diseconomies of scale. 7.5
occur when the average cost of production rises as output increases. 7.5
Is total revenue minus total cost, including both explicit and implicit costs. The difference is important because even though a business pays income taxes based on its accounting profit, whether or not it is economically successful depends on its economic profit. 7.1
occur when the average cost of production falls as output increases. Economies of scale refer to the situation where, as the quantity of output goes up, the cost per unit goes down. 7.5
These are out-of-pocket costs, that is, actual payments. The wage and rent that a firm pays for office space are explicit costs. 7.1
These are those that can’t easily be increased or decreased in a short period of time. In the pizza example, the building is a fixed input. Once the entrepreneur signs the lease, he or she is stuck in the building until the lease expires. Fixed inputs define the firm’s maximum output capacity. 7.2
These are more subtle but just as important. They represent the opportunity cost of using resources that the firm already owns. Often for small businesses, they are resources that the owners contribute.7.1
This is the period of time during which at least one or more factors remain fixed. Within a short period of time, the shop owner may not be able to obtain more physical capital or move to a larger space.
This is the period of time during which all factors are variable. Once the lease expires for the pizza restaurant, the shop owner can move to a larger or smaller place. 7.2
curve is actually based on a group of short-run average cost (SRAC) curves, each of which represents one specific level of fixed costs. More precisely, the long-run average cost curve will be the least expensive average cost curve for any level of output. 7.5
Marginal product is the additional output of one more worker. Mathematically, Marginal Product is the change in total product divided by the change in labour: MP=ΔTP/ΔL.
Where the average cost is at its minimum. This is the point where economies of scale are used up and no longer benefit the firm. Figure 9.11 illustrates these points. 7.5
The process (or processes) a firm uses to transform inputs (e.g. labour, capital, raw materials) into outputs, i.e. the goods or services the firm wishes to sell. 7.2
A mathematical expression or equation that explains the engineering relationship between inputs and outputs. 7.2
This is the period of time during which at least one or more factors of production are fixed. During the period of the pizza restaurant lease, the pizza restaurant is operating in the short run, because it is limited to using the current building (an example of capital) —the owner can’t choose a larger or smaller building. Plant size or capital is a fixed factor of production in the short run. 7.2
Of production in the short run, a useful starting point is to divide total costs into two categories: Fixed Costs and Variable Costs. Fixed cost of production is the cost that does not change as output changes and variable cost is the cost that changes as output changes. 7.3
Are his expenditures that do not change regardless of the number of haircuts offered. 7.3
TP is the amount of output produced with a given amount of labour and a fixed amount of capital. In this example, one barber can give 8 haircuts in a day. Two barbers can produce 22 haircuts in a day and so on. 7.2
The income the firm generates from selling its products. We calculate it by multiplying the price of the product times the quantity of output sold 7.1
Are incurred in the act of producing—the more he produces, the greater the variable cost. 7.3
These are those that can easily be increased or decreased in a short period of time. The pizzaiolo can order more ingredients with a phone call, so ingredients would be variable inputs. The owner could hire a new person to work the counter pretty quickly as well. So labour is a variable input. 7.2
