firm
an economic institution that transforms resources (factors of production) into outputs for consumers
sole proprietor
a type of business structure composed of a single owner who supervises and manages the business and is subject to unlimited liability
Partnership
involves more than one owner who shares the management of the business. Also subject to unlimited liability.
Corporation
has most of the legal rights of individuals, and in addition, the corporation can issue stock to raise capital. Stockholders' liability is limited to the value of their stock.
profit
total revenue- total cost
revenue
price per unit * quantity sold
economic costs
explicit (out-of-pocket) + implicit (opportunity) costs
explicit costs
those expenses paid directly to another economic entity, including wages, lease payments. taxes, and utilities
implicit goods
the opportunity costs of using resources that belong to the firm, including depreciation, depletion of business assets, and the opportunity cost of the firm's capital employed in the business
sunk costs
those costs that have been incurred and cannot be recovered, including funds spent on existing technology that have become obsolete and past advertising that has run in the media.
economic profits
profits in excess of normal profits. (These are profits in excess of both explicit and implicit costs.)
normal profits
the return on capital necessary to keep investors satisfied and keep capital in the business over the long run
short run
a period of time over which at least one factor of production (resources) is fixed, or cannot be changed
long run
a period of time sufficient for firms to adjust all factors of production, including plant capacity
production
the process of turning inputs into outputs
marginal product
the change in output that results from a change in labor
average product
output per worker, found by dividing total output by the number of workers employed to produce that output (Q/L)
increasing marginal returns
a new worker hired adds more to total output than the previous worker hired, so that both average and marginal products are rising.
diminishing marginal returns
occur when adding a worker adds less to output than the previous worker hired
an additional worker adds to total output, but at a diminishing rate
negative marginal returns
occur when adding a worker actually leads to less total output than with the previous worker hired
fixed costs
costs that do not change as a firm's output expands or contracts, often called overhead.
variable costs
costs that vary with output fluctuations, including expenses such as labor and material costs
average fixed cost
equal to total fixed cost divided by output (TFC/Q)
average variable cost
equal to total variable cost divided by output (TVC/Q)
average total cost
equal to total cost divided by output (TC/Q). Average total cost is also equal to AFC + AVC
marginal cost
the change in total costs arising from the production of additional units of output. Since fixed costs do not change with output, marginal costs are the change in variable costs associated with additional production.
long-run average total cost (LRATC)
in the long run, firms can adjust their plant sizes so LRATC is the lowest unit cost at which any particular output can be produced in the long run
economies of scale
as a firm's output increases, it LRATC tends to deline. This results from specialization of labor and management, and potentially a better use of capital and complementary production techniques.
constant returns to scale
a range of output where average total costs are relatively constant. Fast-food restaurants and movie theaters are examples.
diseconomies of scale
a range of output where average total costs tend to increase. Firms often become so big that management becomes bureaucratic and unable to efficiently control its operations
economies of scope
by producing a number of products that are interdependent, firms are able to product and market these goods at lower costs.