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explicit cost
answer
cost that involves actually laying out money
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implicit cost
answer
does not require an outlay of money; measured by value, in dollar terms, of benefits that are forgone
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accounting profit
answer
business's total revenue minus the explicit cost and depreciation
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economic profit
answer
business's total revenue minus the opportunity cost of its resources; usually less than accounting profit
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marginal revenue
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change in total revenue generated by an additional unit of output
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production function
answer
relationship between the quantity of input a firm uses and the quantity of output it produces
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long run
answer
time period in which all inputs can be varied
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short run
answer
time period in which at least one input is fixed
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fixed cost
answer
cost that does not depend on the quantity of output; cost of fixed input
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variable costs
answer
cost that depends on the quantity of output produced; cost of variable input
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constant returns to scale
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when output increases directly in proportion to an increase in all inputs
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sunk costs
answer
costs that have already been incurred and are nonrecoverable
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price-taking firm
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a firm whose actions have no effect on the market price of the good or service it sells
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price-taking consumer
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a consumer whose actions have no effect on the market price of the good or service he or she buys
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perfectly competitive market
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a market in which all market participants are price-takers
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free entry and exit
answer
when new firms can easily enter into the industry and existing firms can easily leave the industry
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break-even price
answer
the market price at which a firm earns zero profits
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shut down price
answer
A firm will cease production in the short run if the market price falls below this, which is equal to minimum average variable cost
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average product
answer
total product divided by the quantity of the input
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economies of scale
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long-run average total cost falls as the quantity of output increases
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optimal output rule
answer
says that profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cos
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principal of marginal analysis
answer
every activity should continue until marginal benefit = marginal cost
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marginal product
answer
additional quantity of output produced by using one or more unit of that input
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average total cost
answer
total cost divided by quantity of output produced
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average variable cost
answer
variable cost per unit of output
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