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Explicit cost
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A cost that involves actually laying out money.
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Implicit cost
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It does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are forgone.
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Accounting profit
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It is a business's total revenue minus the explicit cost and depreciation.
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Economic profit
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It is the total revenue minus the opportunity cost of its resources.
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Implicit cost of capital
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It is the opportunity cost of the capital used by a business --- the income the owner could have realized from that capital if it had been used in its next best alternative way.
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Normal profit
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It is when an economic profit equal to zero; it is an economic profit just high enough to keep a firm engaged in its current activity.
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Principal 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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It 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 cost.
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Marginal cost curve
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It 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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It 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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It is 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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It is an input whose quantity the firm can vary at any time.
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Long run
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It is the time period in which all inputs can be varied.
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Short run
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it is the time period in which at least one input is fixed.
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Total product curve
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It 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 additional quantity of output produced by using one more unit of that input.
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Diminishing returns to an input
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It is 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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Fixed cost
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A cost that doesn't depend on the quantity of output produced. It is the cost of the fixed input.
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Variable cost
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It is a cost that depends on the quantity of output produced. It is the cost of the variable input.
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Total cost
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A given quantity of output is the sum of the fixed cost and the variable cost of producing that quantity of output.
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Total cost curve
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It shows how total cost depends on the quantity of output.
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Average total cost
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Referred to simply as average cost, it is the total cost divided by quantity of output produced.
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U-shaped average total cost curve
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It falls at low levels of output and then rises at higher levels.
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Average fixed cost
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It is the fixed cost per unit of output.
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Average variable cost
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It is the variable cost per unit of output.
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Minimum-cost output
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It is the quantity of output at which average total cost is lowest --- it corresponds to the bottom of the U-shaped average total cost curve.
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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. For example, with increasing returns to scale, doubling all inputs would cause output to more than double.
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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 loss
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A cost that has already been incurred and is nonrecoverable. A sunk cost should be ignored in a decision about future actions.
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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 that firm's output.
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Standardized product
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Also known as a commodity, 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. An industry controlled by a monopolist is known as a monopoly.
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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 the sole right to profit from that work.
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Oligopoly
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An industry with only a small number of firms.
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Oligopolist
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A producer in such industry is known as an oligopolist.
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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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It measures the percentage of industry sales accounted for by the "x" largest firms, for example the four-firm concentration ratio or the eight-firm concentration ratio.
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Herfindahl-Hirschman index
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It is also called the HHI, it is 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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It is 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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