Chapter 12 (Chapter 13 in 10th edition) Key Terms

1. Total Revenue (TR): The total amount of money a firm receives from selling its goods or services.
Example: A coffee shop sells 100 cups of coffee at $3 each, so its total revenue is $300.
 Formula: TR = Price × Quantity
2. Total Cost (TC): The total expense incurred in producing a good or service, including both fixed
and variable costs. Example: A bakery spends $200 on ingredients (variable costs) and $100 on
rent (fixed costs), making the total cost $300.
 Formula: TC = Fixed Costs + Variable Costs
3. Profit: The financial gain achieved when the amount of revenue gained exceeds the expenses,
costs, and taxes involved in sustaining the activity. Example: If a bookstore earns $5000 in
revenue and has $3000 in total costs, the profit is $2000.
 Formula: Profit = Total Revenue - Total Cost
4. Explicit Costs: Direct, out-of-pocket payments for inputs to production, such as wages, rent, and
materials. Example: Paying $1500 for rent and $2000 for salaries.
5. Implicit Costs: The opportunity costs of using resources owned by the firm for its current purpose
rather than the next best alternative. Example: A business owner foregoing a $50,000 salary to
run the business instead of working elsewhere.
6. Economic Profit: Total revenue minus total costs, including both explicit and implicit costs.
Example: A firm with $5000 in revenue, $3000 in explicit costs, and $1000 in implicit costs has an
economic profit of $1000.
 Formula: Economic Profit = Total Revenue - (Explicit Costs + Implicit Costs)
7. Accounting Profit: Total revenue minus explicit costs, not accounting for implicit costs. Example:
With $5000 in revenue and $3000 in explicit costs, the accounting profit is $2000.
 Formula: Accounting Profit = Total Revenue - Explicit Costs
8. Production Function: A mathematical representation of the relationship between inputs used in
production and the output generated. Example: If a factory uses different numbers of workers
(input) to produce cars (output), the production function could show how many cars are
produced as more workers are hired.
9. Marginal Product: The additional output produced as a result of adding one more unit of a
specific input, keeping other inputs constant. Example: Hiring an additional worker increases
production from 50 to 55 units; the marginal product of the worker is 5 units.
 Formula: Marginal Product = Change in Total Output / Change in Input Quantity
10. Diminishing Marginal Product: The principle that as additional units of an input are added to fixed
amounts of other inputs, the marginal product of the variable input at some point starts to
decline. Example: After hiring 5 workers, each additional worker contributes less to output than
the previous one.
11. Fixed Costs (FC): Costs that do not vary with the level of output. Example: Monthly rent of $1000
for a store space.
12. Variable Costs (VC): Costs that vary directly with the level of output. Example: Cost of coffee
beans that increases as more coffee is sold.
13. Average Total Cost (ATC): Total cost divided by the quantity of output produced. Example: If total
cost is $300 for 100 units of output, ATC is $3 per unit.
 Formula: ATC = TC / Quantity
14. Average Fixed Cost (AFC): Fixed cost divided by the quantity of output produced. Example: If fixed
costs are $100 and 100 units are produced, AFC is $1 per unit.
 Formula: AFC = FC / Quantity
15. Average Variable Cost (AVC): Variable cost divided by the quantity of output. Example: If variable
costs are $200 for 100 units of output, AVC is $2 per unit.
 Formula: AVC = VC / Quantity
16. Marginal Cost (MC): The increase in total cost that arises from producing one additional unit of
output. Example: If producing an additional unit increases total cost from $300 to $308, MC is $8.
 Formula: MC = Change in TC / Change in Quantity
17. Efficient Scale: The level of production at which the average total cost is minimized. Example: A
bakery finds its average total cost is lowest when producing 500 loaves of bread per day.
18. Economies of Scale: The cost advantages that a firm obtains due to expansion. Example: A car
manufacturer reduces average costs by increasing production because fixed costs are spread
over more units.
19. Diseconomies of Scale: The phenomenon where, after a certain point, further increases in
production lead to a rise in average costs. Example: A software company grows too large, leading
to communication issues and inefficiencies that increase average costs.
20. Constant Returns to Scale: A situation where increasing the scale of production leads to a
proportional increase in output. Example: Doubling the inputs for a factory results in exactly
doubling the output, neither more nor less.