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Economics Chapter 4
| Term | Definition |
|---|---|
| Business | An organization that brings individuals, financial and economic resources together to produce goods and services. |
| Production | the process of transforming a set of resources (LLC) into a good or service that has economic value |
| Inputs | Resources used in the production process |
| Output | the result of production or the quantity of goods and services that are produced. |
| Primary business | resources are extracted or cultivated |
| Secondary business | resources make fabricated or processed goods |
| Service (tertiary) businesses | retail or wholesale goods |
| Labour Intensive Process | more labour and less capital ex: building a home |
| Capital Intensive Process | more capital and less labour ex: building a car |
| Explicit costs | payments made by a business to another business/people outside it |
| Implicit costs | are the estimates of what an owner gives up by being involved with a business |
| Accounting Profit | Revenue - Explicit Costs |
| Economic Profit | Revenue - (Explicit Costs + Implicit Costs) |
| Fixed Inputs | inputs that can not be adjusted in the short run |
| Variable inputs | input that can adjusted in the short run |
| Total Product (TP) | The overall quantity of output with a given workforce. To increase production you must increase the variable input |
| Average Products | the quantity of output product per worker (Q/L) |
| Marginal Product | the extra output produced by an additional worker (change in Q/ change in L) |
| Fixed Costs (FC) | do not change when a company changed its quantity of output (FC) |
| Variable Costs (VC) | change when a company adjusts the quantity produced |
| Total Costs | the sum of all fixed and variable costs at each quantity of output (FC+VC) |
| Marginal Cost | the extra cost of producing an additional unit of output (change in TC/ change in TP) |
| Average Fixed Cost | the fixed cost per unit of output (FC/TP) |
| Average Variable Cost | the variable cost per unit of output (VC/TP) |
| Average Cost | total cost per unit of output (AFC+AVC) |
| Law of Diminishing Marginal Returns | at some point, as more Variable inputs are added to Fixed inputs, the marginal product will start to decrease |
| Increasing Returns to Scale | a situation in which a % increase in all inputs causes a larger % increase in output. Reasons: Division of Labour, specialization of capital, and specialization of management. Ex: Ford, Amazon |
| Constant Returns to Scale | a situation in which a % increase in all inputs causes an exact increase in outputs. Ex: small businesses |
| Decreasing Returns to Scale | A situation in which a % increase in all inputs causes a smaller % increase in outputs. Reasons: Management difficulties, limited resources. Ex: handmade products, very small businesses |
| Long Run Average Cost | is the lowest value of the SR AC at each possible level of output. |
Created by:
Livi1234
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