Key Terms

accounting profit
total revenues minus explicit costs, including depreciation
average profit
profit divided by the quantity of output produced; profit margin
average total cost
total cost divided by the quantity of output
average variable cost
variable cost divided by the quantity of output
constant returns to scale
expanding all inputs proportionately does not change the average cost of production
diseconomies of scale
the long-run average cost of producing each individual unit increases as total output increases
economic profit
total revenues minus total costs (explicit plus implicit costs)
explicit costs
out-of-pocket costs for a firm, for example, payments for wages and salaries, rent, or materials
firm
an organization that combines inputs of labor, capital, land, and raw or finished component materials to produce outputs
fixed cost
expenditure that must be made before production starts and that does not change regardless of the level of production
implicit costs
opportunity cost of resources already owned by the firm and used in business, for example, expanding a factory onto land already owned
long-run average cost (LRAC) curve
shows the lowest possible average cost of production, allowing all the inputs to production to vary so that the firm is choosing its production technology
marginal cost
the additional cost of producing one more unit
normal profit
when economic profit is equal to zero
private enterprise
the ownership of businesses by private individuals
production
the process of combining inputs to produce outputs, ideally of a value greater than the value of the inputs
production technologies
alternative methods of combining inputs to produce output
revenue
income from selling a firm’s product; defined as price times quantity sold
short-run average cost (SRAC) curve
the average total cost curve in the short term; shows the total of the average fixed costs and the average variable costs
total cost
the sum of fixed and variable costs of production
variable cost
cost of production that increases with the quantity produced