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explicit costs
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The opportunity costs of using resources owned by a firm.
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economic profit
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Total revenue minus explicit and implicit costs.
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normal profit
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The minimum profit necessary to keep a firm in operation. A firm that earns normal profits earns total revenue equal to its total opportunity costs.
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fixed imput
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Any resource for which the quantity cannot change during the period of time under consideration.
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variable imput
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Any resource for which the quantity can change during the period of time under consideration.
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short run
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A period of time so short that there is at least one fixed input.
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long run
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A period of time so long that all inputs are variable.
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production function
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The relationship between the maximum amounts of output a firm can product and various quantities of inputs.
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marginal products
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The change in total output produced by adding 1 unit of a variable, with all other imputs used being held constant.
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law of diminishing returns
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The principles that states that beyond some point, the marginal product decreases as additional units of variable factor are added to a fixed factor.
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total fixed cost (TFC)
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Costs that do not vary as output varies and that must be paid even if output is zero. There are payments that the firm must make in the short run, regardless of the level of output.
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total variable cost (TVC)
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Costs that are zero when output is zero and vary as output varies.
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total cost (TC)
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The sum of total fixed cost and the total variable cost ad each level of output.
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average fixed cost (AFC)
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Total fixed cost divided by the quantity of output produced.
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average variable cost (AVC)
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Total cariable cost divided by the quantity of output produced.
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average total cost (ATC)
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Total cost divided by the quantitiy of output produced.
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marginal cost (MC)
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The change in total cost when one additional unit of output is produced.
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marginal-average rule
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The rule that states when marginal cost is below average cost, average cost falls.
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When marginal cost is above average cost, average cost rises.
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When marginal cost equals average cost, average cost is at its minimum point.
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long-run average cost curve (LRAC)
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The curve that traces the lowest cost per unit at which a firm can produce any level of output after the firm can build any desired plant size.
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economics of scale
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A situation in which the long-run average cost curve declines as the firm increases output.
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constant returns to scale
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A situation in which the long-run average cost curve does not change as the firm increases output.
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diseconomies of scale
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A situation in which the long-run average cost curve rises as the firm increases output.
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