Glossary
Accounting Costs
Explicit, out-of-pocket expenses that a firm pays for its inputs, recorded in financial statements.
Example:
The money a coffee shop spends on coffee beans, milk, and employee wages are all accounting costs.
Accounting Profit
Total revenue minus explicit (accounting) costs.
Example:
A freelance designer earns 1,000 for software and office supplies (accounting costs), so their accounting profit is $4,000.
Average Fixed Cost (AFC)
The fixed cost per unit of output, calculated by dividing total fixed cost by the quantity produced.
Example:
If fixed costs are 2.
Average Total Cost (ATC)
The total cost per unit of output, calculated by dividing total cost by the quantity produced.
Example:
If producing 100 widgets costs 5.
Average Variable Cost (AVC)
The variable cost per unit of output, calculated by dividing total variable cost by the quantity produced.
Example:
If the variable cost to produce 100 widgets is 3.
Diminishing Returns
A point at which adding more of a variable input to a fixed input will eventually result in smaller increases in output.
Example:
Adding more and more workers to a single, fixed-size pizza oven will eventually lead to diminishing returns as workers get in each other's way and productivity per worker declines.
Economic Costs
The sum of explicit (accounting) costs and implicit (opportunity) costs, representing the total value of all resources used in production.
Example:
When calculating the economic costs of opening a new restaurant, you'd include not only the rent and food supplies but also the income the owner gave up by not working at their previous job.
Economic Profit
Total revenue minus economic costs (explicit costs plus implicit costs).
Example:
If the freelance designer from the previous example could have earned 4,000 - 2,000.
Fixed Costs (FC)
Costs that do not change with the level of output produced; they are incurred even if no output is produced.
Example:
The monthly rent for a factory building is a fixed cost because it must be paid regardless of how many units are manufactured.
Implicit Costs
The opportunity costs of using resources that the firm already owns, for which no direct monetary payment is made.
Example:
If a business owner uses their own building for their shop instead of renting it out, the foregone rental income is an implicit cost.
Long-Run
A period of production where all inputs are variable, allowing a firm to adjust its scale of operations completely.
Example:
Given enough time, the bakery can decide to build a new, larger facility or purchase more advanced ovens, making all its inputs long-run variable.
Marginal Cost (MC)
The additional cost incurred by producing one more unit of output.
Example:
If producing 10 pizzas costs 108, the marginal cost of the 11th pizza is $8.
Profit
The difference between a firm's total revenue and its total costs.
Example:
A lemonade stand makes 30 in costs (TC), resulting in a profit of $70.
Short-Run
A period of production where at least one input, typically capital, is fixed and cannot be easily changed.
Example:
A local bakery operating in the short-run might be able to hire more bakers or buy more flour, but it cannot quickly expand its oven capacity or physical storefront.
Total Cost (TC)
The sum of all fixed costs and variable costs incurred in producing a given level of output.
Example:
If a t-shirt company pays 2 for each t-shirt produced (VC), and makes 100 t-shirts, its total cost would be 2 * 100) = $700.
Total Revenue (TR)
The total amount of money a firm receives from selling its output, calculated as price per unit multiplied by the quantity sold.
Example:
If a concert ticket costs 50,000.
Variable Costs (VC)
Costs that change directly with the level of output produced; they increase as production increases and decrease as production decreases.
Example:
The cost of raw materials, like the denim used to make jeans, is a variable cost because more denim is needed as more jeans are produced.