Economic (opportunity) cost
The value or worth of a resource would have in its best alternative use; the payments a firm must make, or the incomes it must provide, to attract the resources it needs away from alternative production opportunities
Explicit costs
The monetary payments (or cash expenditures) a firm makes to those who labor services, materials, fuel, transportation services, and the like; Such money payments are for the use of resources owned by others
Implicit costs
The opportunity costs of using its self-owned self-employed resources; monetary payments that self-employed resources could have earned in their best alternative use
Normal profit
The implicit cost of entrepreneurship
Economic profit
Total revenue less economic costs (explicit and implicit costs; the residual profit that goes to the entrepreneur in the case that the firm's total revenue exceeds all economic costs
Short run
A period too brief for a firm to alter its plant capacity, yet long enough to permit a change in the degree to which the fixed plant is used
Long run
A period long enough for it to adjust the quantities of all the resources that it employs including plant capacity; also includes enough time for existing firms to dissolve and leave the industry or for new firms to be created and enter the industry
Total product
the total quantity, or total output, or a particular good or service produced
Marginal product
The extra output or added product associated with adding a unit of a variable resource to the production process;
Change in total product / Change in labor input
Average product
Output per unit of labor unit; also called labor productivity;
Total product / Units of labor
Law of diminishing returns
Assuming that technology is fixed and thus the techniques of production do not change, as successive units of a variable resource are added to a fixed resource, beyond some point the marginal product that can be attributed to each additional unit of the v
Fixed costs
Costs that in total do not vary with changes in output; often associated with the very existence of a firm's plant and therefore must be paid even if its output is zero; examples: rental payments, interest on a firm's debts, a portion of depreciation on e
Variable costs
Costs that change with the level of output; examples: payments for materials, fuel, power, transportation services, most labor, etc.; can be controlled or altered in the short run by changing production levels
Total cost
The sum of fixed cost and variable cost at each level of output
Average fixed cost
Total fixed cost / output
graphically, continuously declining curves as total output is increased
Average variable cost
Total variable cost / output
Average total cost
Total cost / output
= AFC + AVC
Marginal cost
The extra, or additional, cost of producing one more unit of output; can be determined for each added unit of output by noting the change in total cost that unit's production entails:
Change in total cost / change in output
Costs the firm can control dire
Economies of scale
Economies of mass production; the consequence of greater specialization of labor and management, more efficient capital equipment, and the spreading of start-up costs among more units of output
Diseconomies of scale
Caused by the problems of coordination and communication that arise in large firms
Constant returns to scale
Long-run average cost does not change; has to do with the range between the ouput at which economies of scale end and the output at which diseconomies of scale begin
Minimum efficient scale
The lowest level of output at which a firm can minimize long-run average costs
Natural monopoly
When economies of scale extend beyond the market's size resulting in a relatively rare market situation in which average total cost is minimize when only one firm produces the particular good or service