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Average fixed cost
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The fixed cost per unit of output.
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Average total cost
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The total cost per unit of output.
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Average variable cost
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The variable cost per unit of output.
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Returns to scale
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Situation where increase in production due to increase in all inputs.
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Constant returns to scale
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If in the long-run total cost increases by the same proportion as output.
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Dis-economies of scale
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Also known as decreasing returns to scale. Increase in the unit cost of production as the firm increases its capacity.
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Economies of scale
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Also known as increasing returns to scale. The reduction in the unit cost of production as the firm increases its capacity.
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Economies of scope
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The reduction in cost resulting from the joint production of two or more goods or services.
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Engineering cost estimating
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Method of estimating long-run costs. Calculate optimal combinations of inputs needed to produce given quantities of output. Monetary values are assigned to obtain cost.
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Estimation of long-run cost functions
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Analysis that assumes all factors, especially capital, are variable.
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Estimation of short-run cost functions
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Analysis in which certain factors are assumed to be fixed during the period analyzed.
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Experience curve
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The relationship between the unit cost of labor and all inputs associated with the production process.
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Historical cost
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The cost incurred in a past activity.
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Incremental cost
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Total cost associated with a particular decision.
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Learning curve
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Relationship between the unit cost of labor and the total amount of output produced by labor that is directly associated with the production process.
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Marginal Cost
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The cost to a firm of producing an additional unit of an output.
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Opportunity cost
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The amount of subjective value forgone in choosing one activity over the next best alternative.
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Relevant costs
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Costs that are affected by a current decision alternative and that must therefore be taken into account in the decision. (variable + incremental costs)
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Sunk cost
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A cost already incurred.
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Supply chain management
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Efforts by a firm to improve efficiencies through each link of a firm's supply chain from a supplier to customer.
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Survivor-ship technique
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A method for estimating long-run cost curves. Proportion of total industry output by firms of different sizes is observed over a period of time.
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Total Cost
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The total cost of production, including both total variable and total fixed costs.
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Total cost function
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Economic analysis considers three basic functional forms of total cost: cubic, quadratic, and linear.
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Total fixed cost
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A cost that remains constant as the level of output varies.
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Total variable cost
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The total cost to a firm of using its variable inputs.
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Contribution margin
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The amount of revenue that a firm earns above its total variable cost.
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Economic cost
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All cost incurred to attract resources into a company's employ.
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Economic loss
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A situation that exists when a firm's revenues cannot cover its accounting cost and its opportunity cost of production.
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Economic profit
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Total revenue - total economic cost.
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Market power
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The power to establish the market price.
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Market structure
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The number and relative sizes of the buyers and sellers in a particular market.
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Monopoly
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A market in which there is only one seller for a particular good or service.
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MR=MC rule
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A rule state that if a firm desires to maximize its economic profit, it must produce an amount of output whereby the marginal revenue received at this particular level is equal to its marginal cost.
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Normal profit
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An amount of profit earned in a particular endeavor that is just equal to the profit that could be earned in a firm's next-best alternative activity.
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P=MC rule
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Perfectly competitive markets. Firms are price takers.
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Perfect competition
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Made up of a large number of relatively small buyers and sellers, a standardized product, easy entry and exit, and complete information by all market participants about the market price.
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Price makers
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Firms that exercise market power through product differentiation or by being dominant players in their markets.
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Price takers
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Firms that operate in perfectly competitive markets.
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Pricing for profit
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The method of pricing that follows the MR=MC rule.
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Pricing for revenue
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The pricing of a product to maximize a firm's revenue.
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Short-run supply curve
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The supply curve for a firm in a competitive market is the positively sloped part of its marginal cost curve above minimum AVC.
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Shutdown point
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The point at which the firm must consider ceasing its production activity because the short-run loss suffered by operating would be equal to the short-run loss suffered by not operating.
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