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Sunk Cost
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Any Cost that cannot be recovered
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Explicit Cost
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Actual money spent
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Implicit Cost
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The money value of resources used or benefits forgone
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Depreciation
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An accounting (explicit) cost/it is a calculation expressed in dollars, of a machine's useful life consumed
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Accounting Profit
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Business revenue minus explicit costs and depreciation
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Economic Profit
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Business revenue minus the opportunity cost of its resources (includes both explicit and implicit costs and often less than accounting profit)
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Normal Profit
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The same as earning zero economic profit; profit that is just high enough to keep a firm engaged in its current activity
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Present Value
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What a future value is worth today
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Production Function
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The relationship between the quantity of inputs a firm uses an the quantity of output it produces
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Fixed Input
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An input whose quantity CANNOT vary
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Variable Input
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An input whose quantity CAN vary
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Long Run
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Time period during which all inputs become variable
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Short Run
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Time period during which at least one input is fixed
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Total Product Curve
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Shows how the quantity of output depends on the quantity of a variable input given other fixed inputs. Labor is most commonly this variable input. The slope is equal to the marginal product of the variable
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Marginal Product
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The addition quantity of output produced using one more unity of the variable input. (∆Q/∆Qinput)
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Diminishing Marginal Returns to an Input
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When an increase in the quantity of a variable input, like labor, brings a decline in the marginal product of that input given fixed levels of all other inputs.
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Fixed Cost
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A cost that does not change. It is the same regardless of the quantity produced. (i.e. Rent)
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Variable Cost
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The cost of a variable input like labor. Depends on the quantity produced.
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Total Cost
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The sum of the variable and fixed costs. The total cost curve shows the relationship between the output and total cost. TC = FC + VC
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Marginal Cost
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The change in total cost divided by the change in output. MC = ∆TC/∆Q
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Average Total Cost
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ATC = AFC + AVC ; ATC = TC/Q
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Average Fixed Cost
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AFC = FC/Q
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Average Variable Cost
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AVC = VC/Q
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Spreading Effect
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Fixed cost is spread across more output lowering AFC and ATC. Dominates at lower levels of output.
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Diminishing Returns Effect
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More output required more variable cost, AVC and ATC rises. Dominates at higher levels of output.
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