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Economic Cost
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Explicit cost + Implicit cost
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Explicit Costs
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Input costs that require an outlay of money by the firm
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Implicit Costs
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All the firm's opportunity costs of the resources supplied by the firm's owners for which the owners do not make an explicit charge
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Accounting Profit
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Accounting Profit = Total Revenue − Explicit Costs.
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Normal Profit
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The payment made by a firm to obtain and retain entrepreneurial ability; the minimum income entrepreneurial ability must receive to induce it to perform entrepreneurial functions for a firm.
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Economic Profit
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Economic Profit = Accounting Profit - implicit costs.
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Short Run
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A period of insufficient time to alter all factors of production used in the productive process - at least one input is fixed (usually plant and equipment.)
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Long Run
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A period of sufficient time to alter all factors of production used in the productive process - all inputs can be changed.
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Total Product (TP)
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The total output of a particular good or service produced by a firm.
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Marginal Product (MP)
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The change in total output that results from the employment of one additional unit of a resource.
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Average Product (AP)
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The total output produced per unit of a resource employed (total product divided by the quantity of that employed resource).
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Law of Diminishing Returns
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A principle of production that states that when one factor of production is increased, a point will be reached where each additional input will result in smaller and smaller outputs, or diminishing returns.
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Fixed Costs
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Costs that do not vary with the quantity of output produced.
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Variable Costs
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Costs that change as output changes.
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Total Cost
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Fixed costs + Variable costs.
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Average Fixed Cost (AFC)
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TFC/Q
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Average Variable Cost (AVC)
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TVC/Q
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Average Total Cost (ATC)
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TC/Q
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Marginal Cost (MC)
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the change in total costs associated with a one-unit change in output.
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Economies of Scale
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Cost of producing a unit of a good falls as its output rate increases. As a firm grows in size, efficiency increases.
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Diseconomies of Scale
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An economic concept referring to a situation in which economies of scale no longer function for a firm. Rather than experiencing continued decreasing costs per increase in output, firms see an increase in marginal cost when output is increased. Often due to unable to manage the production of a product on such a large scale.
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Constant Returns to Scale
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The property whereby long-run average total cost stays the same as the quantity of output changes
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Minimum Efficient Scale (MES)
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The lowest level of output at which a firm can minimize long-run average costs.
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Natural Monopoly
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A market that runs most efficiently when one large firm supplies all of the output.
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Sunk Costs
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Costs that have already been incurred and cannot be recovered.
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