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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 foregone.
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Accounting profit
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a business's total revenue minus the explicit cost and depreciation
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Economic profit
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a business's total revenue minus the opportunity cost of its resources; usually less than the accounting profit
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Normal profit
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an economic profit equal to zero; an economic profit just high enough to keep a firm engaged in its current activity
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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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says that profit is maximized by producing the quanitity 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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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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marginal product
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the additional quantity of output produced by using one more unit of an input.
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diminishing returns to an input
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when an increase in the quantity of an 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 does not depend on the quantity of output produced; the cost of the fixed input
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variable cost
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a cost that depends on the quantity of output produced; the cost of the variable input.
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total cost
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the sum of the fixed cost and the variable cost of producing a given quantity of output.
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average total cost
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total cost divided by quantity of output produced; also known as average cost.
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average fixed cost
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the fixed cost pre 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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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, 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 cost
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a cost that has already been incurred and is nonrecoverable; should be ignored in a decision about future actions.
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