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The firm:An organization that employs factors of production to produce a good or serv-
ice that it hopes to profitably sell.Accounting profit:The difference between total revenue and total explicit costs.Economic profit:The difference between total revenue and total explicit and implicit costs.Explicit costs:Direct, purchased, out-of-pocket costs paid to resource suppliers outside the
firm. Also referred to as accounting costs.Implicit costs:Indirect, non-purchased, or opportunity costs of resources provided by the
entrepreneur. Also called economic costs.Short run:A period of time too short to change the size of the plant, but many other, more
variable resources can be adjusted to meet demand.Long run:A period of time long enough to alter the plant size. New firms can enter the
industry and existing firms can liquidate and exit.Production function:The mechanism for combining production resources, with existing
technology, into finished goods and services. Inputs are turned into outputs.Fixed inputs:Production inputs that cannot be changed in the short run. Usually this is the
plant size or capital.Variable inputs:Production inputs that the firm can adjust in the short run to meet
changes in demand for their output. Often this is labor and/or raw materials.Total Product of Labor (TPL):The total quantity, or total output, of a good produced at
each quantity of labor employed.Marginal Product of Labor (MPL):The change in total product resulting from a change in
the labor input. MPL=DTPL/DL, or the slope of total product.Average Product of Labor (APL):Total product divided by labor employed: APL=TPL/L.Law of diminishing marginal returns:As successive units of a variable resource are added
to a fixed resource, beyond some point the marginal product declines.Total fixed costs (TFC):Costs that do not vary with changes in short-run output. They
must be paid even when output is zero.Total variable costs (TVC):Costs that change with the level of output. If output is zero, so
are total variable costs.Total cost (TC):The sum of total fixed and total variable costs at each level of output:
TC =TVC +TFC.Marginal cost (MC): The additional cost of producing one more unit of output.
MC =DTC/DQ=DTVC/DQor the slope of total cost and total variable cost.Average fixed cost (AFC):Total fixed cost divided by output: AFC =TFC/Q.Average variable cost (AVC):Total variable cost divided by output: AVC =TVC/Q.Average total cost (ATC):Total cost divided by output. ATC =TC/Q=AFC +AVC.114 › Step 4. Review the Knowledge You Need to Score High
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