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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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a cost that 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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the business's total revenue minus the explicit cost and depreciation
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Economic Profit
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the business's total revenue minus the opportunity cost of its resources; usually less than the accounting profit
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Implicit cost of capital
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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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when an economic profit is equal to zero and it is an economic profit just high enough to keep a firm engaged in its current activity.
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Principle of marginal analysis
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principle that states that 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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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 time period in which at least one input 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 additional quantity of output that is produced by using one more unit of that 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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