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Economics: Chapter #4

Outputs
Goods and services businesses sell to customers.
Inputs
Goods and services businesses use to produce the outputs.
Production
The process of turning inputs into outputs.
Revenue
The money a business receives from the sales of its outputs to customers.
Cost
What the business pays for its inputs.
Profit
The difference between revenue and costs.
Profit Maximization
The people running a business want to operate it in a way that yields the largest difference between revenues and costs.
Labor
The inputs supplied by various kinds of workers.
Capital
The long-lived equipment, software, and structures used in the production process.
Land
The actual ground used by a business.
Intermediate Inputs
Goods and services purchased from other businesses and used up in production.
Business Know-How
All the knowledge and technology necessary for the production process.
Production Function
What the output is going to be based on the inputs.
Marginal Production of Labor
The extra amount of output a business can generate by adding one more hour of labor or one more worker.
Diminishing Marginal Product
The marginal product will fall as the number of workers rises, holding other imports constant.
Average Product
The output divided by the number of labor hours or by the number of workers (output per hour or output per worker).
Outsourcing
Hiring outside sellers to handle tasks their own employees once did.
Cost of Labor
Monetary outlays for workers.
Cost of Capital and Land
The outlay for buying or renting equipment, structures, and land.
Cost of Intermediate Inputs
The money a business pays for goods and services purchased from other companies.
Cost of Accumulating Business Know-How
Any outlays that increase a company’s knowledge and capabilities are part of the cost of accumulating business know-how.
Total Cost
Cost of labor + Cost of capital and land + Cost of intermediate inputs + Cost of accumulating business know-how.
Cost Function
Reports the total cost of producing each level of output.
Marginal Cost
The added expense of producing one more unit of output.
Marginal Cost
Added Cost of producing original units of output divided by the number of additional units of output.
Variable Costs (Short-Term Costs)
Costs that managers can quickly raise or lower by decisions they make today.
Fixed Costs (Long-Term Costs)
Costs that are harder to change; a decision by a business to change its fixed costs will take longer to have an effect.
Short-Term Cost Function
Assumes fixed costs can’t be changed.
Long-Term Cost Functions
Allows all costs to be changed.
Revenue
The amount of money companies get from selling their products or services.
Marginal Revenue
The additional money a business gets from producing and selling one more unit of output.
Profit-Maximizing Rule
“A proft-maximizing business will increase production as long as marginal revenue exceeds marginal cost.”
Short-Term Profit Maximization
Focused on achieving the highest profit, assuming that fixed costs cannot be changed.
Long-Term Profit Maximization
Assumes a business can vary all its inputs, even going as far as shutting down.
We assume that businesses attempt to maximize profits, within the rules of the game and their moral framework
What do we assume about business in maximizing profits?

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