Production & Costs
All 24 Production & Costs terms in the AP Economics glossary — each with a clear, exam-accurate definition. Tap any term for the full explanation, formula, and related interactive graph.
Accounting profit is total revenue minus explicit costs, as recorded on a firm's financial statements.
Average Fixed Cost is the fixed cost per unit of output produced.
Average Product is the total output produced per unit of a variable input, typically labor.
Average Total Cost is the total cost per unit of output produced.
Average Variable Cost is the variable cost per unit of output produced.
Diseconomies of scale occur when long-run average total cost increases as output increases.
Economic profit is total revenue minus both explicit and implicit costs, including opportunity costs.
Economies of scale occur when long-run average total cost decreases as output increases.
Explicit Costs are direct, out-of-pocket payments made by a firm for inputs purchased from others.
Fixed Costs are costs that do not change with the level of output in the short run.
Implicit Costs are non-monetary opportunity costs of using the firm’s own resources.
The law of diminishing marginal returns states that adding more of a variable input to fixed inputs eventually yields smaller increases in output.
Marginal Cost is the additional cost incurred by producing one more unit of output.
Marginal Product is the additional output produced by adding one more unit of a variable input, holding all other inputs constant.
Normal profit is the minimum return needed to keep a firm in business, equal to the opportunity cost of the owner's resources.
A production function shows the maximum output a firm can produce from given quantities of inputs.
The short run is a period when at least one input is fixed, while the long run is a period when all inputs are variable.
A sunk cost is a cost that has already been incurred and cannot be recovered.
Total Cost is the sum of all fixed and variable costs incurred by a firm in producing a given level of output.
Total Product is the total quantity of output produced by a firm using a given amount of inputs in a specific time period.
Variable Costs are costs that change directly with the level of output in the short run.
The least-cost rule says a firm minimizes the cost of any output when the marginal product per dollar is equal across all inputs: MPL/PL = MPK/PK.
The marginal-average rule explains that an average curve falls when marginal is below it and rises when marginal is above it, so MC cuts ATC and AVC at their minimum points.
The envelope curve is the long-run average total cost curve, which 'wraps around' and is tangent to every short-run ATC curve, lying on or below all of them.