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explicit cost
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cost that involves laying out money
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implicit cost
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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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total revenue minus explicit cost and depreciation
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economic profit
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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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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 from an additional unit sold
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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 quantity of inputs used to make a good and the quantity of output of that good produces.
text- the quantity of inputs a firm uses and the quantity of output it produces.
text- 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 can vary at any time; changeable.
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long run
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the time period in which all inputs can be varied (break-even)
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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 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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fixed costs
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a costs that does not depends on the quantity of the output produced. 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. Cost of the variable input.
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total cost
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fixed cost + variable cost
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total cost curve
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shows how total cost depends on the quantity of output
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Average Total Cost (ATC)
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total costs divided by quantity of output
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U-shaped average total cost curve
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falls at low levels of output, then rises at higher levels
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Average Fixed Cost (AFC)
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FC/Q; fixed cost per unit of output.
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Average Variable Cost (AVC)
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VC/Q; variable cost per unit quantity.
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minimum-cost output
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the quantity of output at which the average total cost is lowest—the bottom of the U-shaped average total cost curve.
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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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increasing returns to scale
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when output increases more than in proportion to an increase in all inputs
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economies of scale
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long-run average total cost declines as output increases
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Deceasing returns to scale
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when output increases less than in proportion to an increase in all inputs
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diseconomies of scale
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long-run average total cost increases as output increases
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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 (lost/spent) and is nonrecoverable
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price-taking producer
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a firm whose actions have no effect on the market price of the good or service it sells
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price-taking consumer
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a consumer whose actions have no effect on the market price of the good or service he or she buys
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perfectly competitive market
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a market in which all market participants are price-takers
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perfectly competitive industry
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an industry in which firms are price-takers
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market share
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the fraction of the total industry output accounted for by that firm's output.
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standardized product (commodity)
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when consumers regard the products of different producers as the same good
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free entry and exit
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when new firms can easily enter into the industry and existing firms can easily leave the industry
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monopolist/monopoly
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the only producer of a good that has no close substitutes
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barriers to entry
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business practices or conditions that make it difficult for new firms to enter the market
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natural monopoly
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exists when economies of scale provide a large cost advantage to a single firm that produces all of an industry's output.
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patent
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gives an inventor a temporary monopoly in the use or scale of an invention
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copyright
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gives the creator of a literary or artistic work the sole right to profit from that work
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Oligopoly/Oligopolist
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an industry with only a small number of producers (oligopolist)
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imperfect competition
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when no one firm has a monopoly, but producers nonetheless realize that they can affect market prices
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monopolistic competition
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a market structure in which there are many competing firms in an industry, each firm sells a differentiated product, and there is free entry into and exit from the industry in the long run
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