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Profit
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total revenue minus total cost
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total revenue
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Price x Quantity
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explicit costs
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costs that require an outlay of money
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implicit costs
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does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are forgone, opportunity costs
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accounting profit
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the business's total revenue minus the explicit cost and depreciation
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economic profit
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total revenue minus total cost, including both explicit and implicit costs
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implicit cost of capital
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the opportunity cost of the use of one's own capital - the income earned if the capital had been employed in its next best alternative use
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normal profit
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an economic profit equal to zero; an economic profit just high enough to keep a firm engaged in its current activity
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optimal output rule
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profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost
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principle of marginal analysis
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every activity should continue until marginal benefit equals marginal cost
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marginal revenue
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The change in total revenue generated by an additional unit of output.
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optimal output rule
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profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost
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marginal cost curve
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shows how the cost of producing one more unit depends on the quantity that has already been produced
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Marginal revenue curve
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shows how marginal revenue varies as output varies
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production function
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the relationship between the quantity of inputs a firm uses and the quantity of output it produces
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fixed input
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an input whose quantity is fixed for a period of time and cannot be varied
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variable input
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An input whose quantity the firm can vary at any time.
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Fixed Cost (FC)
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a cost that does not depend on the quantity of output produced. It's the cost of the fixed inputs.
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Variable Costs (VC)
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Costs that depends on the quantity of output produced. It's the cost of the variable inputs.
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Total Cost (TC)
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total fixed costs plus total variable costs
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long run
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the time period in which all inputs can be varied
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short run
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the period of time during which at least one of a firm's inputs is fixed
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total product curve
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shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input
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marginal product
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the increase in output that arises from an additional unit of input
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diminishing returns to an input
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when an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input
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total cost curve
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shows how total cost depends on the quantity of output
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Average Total Cost (ATC)
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total costs divided by quantity of output
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U-shaped average total cost curve
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falls at low levels of output, then rises at higher levels
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Average Fixed Cost (AFC)
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total fixed costs divided by quantity of output
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Average Variable Cost (AVC)
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variable cost divided by the quantity of output
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minimum-cost output
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the quantity of output at which the average total cost is lowest—the bottom of the U-shaped average total cost curve.
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average product
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Total product divided by the quantity of the input.
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Average product curve
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shows the relationship between the average product and the quantity of the input
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long-run average total cost curve
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shows the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output
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economies of scale
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when long-run average total cost declines as output increases
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increasing returns to scale
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when output increases more than in proportion to an increase in all inputs
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minimum efficient scale
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Smallest quantity at which a firm's long-run average total cost is minimized.
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diseconomies of scale
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when long-run average total cost increases as output increases
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Decreasing returns to scale
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when output increases less than in proportion to an increase in all inputs
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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 cost
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a cost that has already been paid and cannot be recovered
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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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perfectly competitive industry
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an industry in which firms are price-takers
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market share
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the fraction of the total industry output accounted for by a given producer's output
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standardized product (commodity)
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when consumers regard the products of different firms as the same good
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free entry and exit
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when new firms can easily enter into the industry and existing firms can easily leave the industry
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Monopolist
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the only producer of a good that has no close substitutes
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Monopoly
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an industry controlled by a monopolist
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barriers to entry
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Something that prevents other firms from entering the industry.
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Natural monoploly
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When economies do scale provide a large cost advantage to a single firm that produces all of an industry's output.
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patent
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gives an inventor a temporary monopoly in the use or sale of an invention
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Copyright
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gives the creator of a literary or artistic work sole rights to profit from that work for a specified period of time
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Oligopoly
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an industry with only a small number of producers
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Oligopolist
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a producer in an oligopoly
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imperfect competition
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when no one firm has a monopoly, but producers nonetheless realize that they can affect market prices
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concentration ratios
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measures the percentage of industry sales accounted for by the "X" largest firms
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Herfindahl-Hirschman Index
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The square of each firm's share of market sales summed over the industry. It gives a picture of the industry market structure.
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monopolistic competition
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a market structure in which there are many competing firms in an industry, each firm sells a differentiated product, and there is free entry into and exit from the industry in the long run
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price-taking firm's optimal output rule
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says that a price-taking firm's profit is maximized by producing the quantity of output at which the market price is equal to the marginal cost of the last unit produced
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break-even point
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Of a price-taking firm is in the market price at which it earns zero profit.
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shut-down price
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when a firm ceases production in the short run if the market price falls below this price; equal to minimum average variable cost
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Short-Run Firm Supply Curve
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Shows how an individual firm's profit-maximizing level of output depends on the market price, taking the fixed cost as given.
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industry supply curve or market supply curve
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Shows the relationship between the price of a good and the total output of the industry as a whole
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short-run industry supply curve
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shows how the quantity supplied by an industry depends on the market price given a fixed number of producers
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long-run market equilibrium
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when the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur
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long-run industry supply curve
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shows how the quantity supplied responds to the price once producers have had time to enter or exit the industry
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constant cost industry
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Firms' cost curves are unaffected by changes in the size of the industry and the long-run industry supply curve is horizontal (perfectly elastic)
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increasing cost industry
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Firms' production costs increase with the size of the industry and the long-run industry supply curve is upward-sloping.
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decreasing cost industry
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Firms' production costs decrease as the industry grows and the long-run supply curve is downward sloping.
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