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Explicit Costs
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Costs that involve a direct monetary outlay.
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Implicit Costs
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Costs that do not involve outlays of cash.
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Opportunity Costs
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The value of the next best alternative that is forgone when another alternative is chosen.
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Economic Costs
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The sum of the firm's explicit costs and implicit costs.
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Accounting Costs
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The total of explicit costs that have been incurred in the past.
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Sunk Costs
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Costs that have already been incurred and cannot be recovered.
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Non-Sunk Costs
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Costs that are incurred only if a particular decision is made.
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Cost-Minimization Problem
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The problem of finding the input combination that minimizes a firm's total cost of producing a particular level of output.
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Cost-Minimization Firm
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A firm that seeks to minimize the cost of producing a given amount of output.
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Long Run
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The period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant
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Short Run
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The period of time in which at least one of the firm's input quantities cannot be changed.
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Isocost Line
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The set of combinations of labor and capital that yield the same total costs for the firm.
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Expansion path
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A line that connects the cost-minimizing input combinations as the quantity of output, Q, varies, holding input prices constant
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Normal Input
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An input whose cost-minimizing quantity increases as the firm produces more output.
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Inferior Input
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An input whose cost-minimizing quantity decreases as the firm produces more output.
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Labor Demand Curve
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A curve that shows how the firm's cost-minimizing quantity of labor varies with the price of labor.
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Capital Demand Curve
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A curve that shows how the firm's cost-minimizing quantity of capital varies with the price of capital.
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Price Elasticity of Demand for Labor
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The percentage change in the cost-minimizing quantity of labor with respect to a 1 percent change in the price of labor.
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Price Elasticity of Demand for Capital
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The percentage change in the cost-minimizing quantity of capital with respect to a 1 percent change in the price of capital.
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Total Variable Cost
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The sum of expenditures on variable inputs, such as labor and materials, at the short-run cost-minimizing input combination.
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Total Fixed Cost
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The cost of fixed inputs; it does not vary with output.
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Duality
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The correspondence between the production function and the input demand functions.
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Long-Run Total Cost Curve
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A curve that shows how total cost varies with outputs, holding input prices fixed and choosing all inputs to minimize cost. TC = f(q)
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Long-Run Average Cost
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The firm's total cost per unit of output. It equals long-run total cost divided by total quantity.
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Long-Run Marginal Cost
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The rate at which long-run total cost changes with respect to change in output
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Economies of Scale
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A characteristic of production in which average cost decreases as output goes up.
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Diseconomies of Scale
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A characteristic of production in which average cost increase as output goes up.
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Indivisible Input
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An input that is available only in a certain minimum size; its quantity cannot be scaled down as the firm's output goes to zero.
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Managerial Diseconomies
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A situation in which a given percentage increase in output forces the firm to increase its spending on the services of managers by more than this percentage.
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Minimum Efficient Scale
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The smallest quantity of output at which the long-run average cost curve attains its minimum point.
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Output Elasticity of Total Cost
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The percentage change in total cost per 1 percent change in output.
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Short-Run Total Cost Curve
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A curve that shows the minimized total cost of producing a given quantity of output when at least one input is fixed.
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Total Variable Cost Curve
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A curve that shows the sum of expenditures on variable inputs, such as labor and materials, at the short-run cost-minimizing input combination.
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Total Fixed Cost Curve
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A curve that shows the cost of fixed inputs and does not vary with output.
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Short-Run Average Cost
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The firm's total cost per unit of output when it has one or more fixed inputs.
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Short-Run Marginal Cost
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The slope of the short-run total cost curve.
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Average Variable Cost
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Total variable cost per unit of output.
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Average Fixed Cost
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Total fixed cost per unit of output.
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Economies of Scope
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A production characteristics in which the total cost of producing given quantities of two goods in the same firm is less than the total costs of producing those quantities in two single-product firms.
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Stand-Alone Cost
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The cost of producing a good in a single-product firm.
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Economies of Experience
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Cost advantages that result from accumulated experience, or as it is sometimes called, learning-by-doing.
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Experience Curve
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A relationship between average variable cost and cumulative production volume. It is used to describe the economies of experience.
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Experience Elasticity
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The percentage change in average variable cost for every 1 percent increase in cumulative volume.
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Slope of the Experience Curve
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How much average variable costs go down, as a percentage of an initial level, when cumulative output doubles.
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Total Cost Function
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A mathematical relationship that shows how total costs vary with the factors that influence total costs, including the quantity of output and the prices of inputs.
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Cost Driver
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A factor that influences or "drives" total or average costs.
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Constant Elasticity Cost Function
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A cost function that specifies constant elasticities of total cost with respect to output and input prices.
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Translog Cost Function
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A cost function that postulates a quadratic relationship between the log of total cost and the logs of input prices and output.
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Shephard's Lemma
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The relationship between the long-run total cost function and the input demand functions: the rate of change of the long-run total cost function with respect to an input price is equal to the corresponding input demand function.
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