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Average Fixed Cost (AFC)
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Total fixed cost divided by the number of units of output; a per-unit measure of fixed costs.
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Average Total Cost (ATC)
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Total cost divided by the number of units of output; a per-unit measure of total costs.
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Average Variable Cost
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Total variable cost divided by the number of units of output; a per-unit measure of variable costs.
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Fixed Cost
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Any cost that does not depend on the firm's level of output. These costs are incurred even if the firm is producing nothing.
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Homogeneous Products
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Undifferentiated products; products that are identical to, or indistinguishable from, one another.
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Marginal Cost (MC)
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The increase in total cost that results from producing 1 more unit of output. Marginal costs reflect changes in variable costs.
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Marginal Revenue (MR)
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The additional revenue that a firm takes in when it increases output by one additional unit. In perfect competition, the marginal revenue is equal to the price.
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Perfect Competition
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An industry structure in which there are many firms, each small relative to the industry, producing identical products, and in which no firm is large enough to have any control over prices. In perfectly competitive industries, new competitors can freely enter the market, and old firms can exit.
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Spreading Overhead
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The process of dividing total fixed costs by more units of output. Average fixed cost declines as quantity rises.
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Total Cost (TC)
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Total fixed costs plus total variable costs.
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Total Fixed Costs (TFC) or Overhead
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The total of all costs that do not change with output even if output is zero.
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Total Revenue (TR)
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The total amount that a firm takes in from the sale of its product: the price per unit times the quantity of output the firm decides to produce (P × q).
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Total Variable Cost (TVC)
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The total of all costs that vary with output in the short run.
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Total Variable Cost Curve
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A graph that shows the relationship between total variable cost and the level of a firm's output.
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Variable Cost
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A cost that depends on the level of production chosen.
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Breaking Even
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The situation in which a firm is earning exactly a normal rate of return.
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Constant Returns To Scale
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An increase in a firm's scale of production has no effect on costs per unit produced.
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Decreasing Returns To Scale/Diseconomies of Scale
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An increase in a firm's scale of production leads to higher costs per unit produced.
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Increasing Returns To Scale/Economies Of Scale
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An increase in a firm's scale of production leads to lower costs per unit produced.
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Long-run Average Cost Curve (LRAC)
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Shows the way per-unit costs change with output in the long run.
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Minimum Efficient Scale (MES)
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The smallest size at which the long-run average cost curve is at its minimum.
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Optimal Scale of Plant
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The scale of plant that minimizes long-run average cost.
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Short-run Industry Supply Curve
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The sum of the marginal cost curves (above AVC) of all the firms in an industry.
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Shutdown Point
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The lowest point on the average variable cost curve. When price falls below the minimum point on AVC, total revenue is insufficient to cover variable costs, and the firm will shut down and bear losses equal to fixed costs.
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Constant-Cost Industry
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An industry that shows no economies or diseconomies of scale as the industry grows. Such industries have flat, or horizontal, long-run supply curves.
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Decreasing-Cost Industry
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An industry that realizes external economies—that is, average costs decrease as the industry grows. The long-run supply curve for such an industry has a negative slope.
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Increasing-Cost Industry
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An industry that encounters external diseconomies—that is, average costs increase as the industry grows. The long-run supply curve for such an industry has a positive slope.
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Long-run Industry Supply Curve (LRIS)
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A graph that traces out price and total output over time as an industry expands.
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