economic (opportunity) cost
a payment that must be made to obtain and retain the services of resource; the income a firm must provide to a resource supplier to attract the resource away from an alternative use; equal to the quantity of other products that cannot be produced when res
explicit costs
the monetary payment a firm must make to an outsider to obtain a resource
implicit costs
the monetary income a firm sacrifices when it uses a resource it owns rather than supplying the resource in the market; equal to what the resource could have earned in the best-paying alternative employment; includes a normal profit
normal profit
the payment made by a firm to obtain and retain entrepreneurial ability; the minimum income entrepreneurial ability must receive to induce it ot perform entrepreneurial functions for a firm
economic profit
the total revenue of a firm less its economic costs (which include both explicit costs and implicit costs); also called 'pure profit' and ' above normal profit'
short run
a period of time in which producers are able to change the quantities of some but not all of the resources they employ; a period in which some resource (usually plant) are fixed and some are variable
long run
a period of time long enough to enable producer of a product to change the quantities of all the resource they employ; a period in which all resource and costs are variable and no resources or costs are fixed
total product (TP)
the total output of a particular good or service produced by a firm (or a group of firms of the entire economy)
marginal product (MP)
the additional output produced when
average product (AP)
additional unit of a resource is employed (the quantity of all other resources employed remaining constant); equal to the change in total produce divided by the change in the quantity of a resource employed
law of diminishing returns
the principle that as successive increments of a variable resource area dded to a fixed resource, the marginal product of the variable resource will eventually decrease
fixed costs
any cost that in total does not change when the firm changes its output; the cost of fixed resources
variable costs
a cost that in total increases when the firm increases its output an decreases when the firm reduces its output
total cost
the sum of fixed cost and variable cost
average fixed cost (AFC)
a firm's total fixed cost divided by output (the quantity of product produced)
average variable cost (ATC)
a firm's total variable cost divided by output (the quantity of produce produced)
marginal cost (MC)
the extra (additional) benefit of producing 1 more unit of output; equal to the change in total cost divided by the change in output (and, in the short run, to the change in total variable cost divided by the change in output)
economies of scale
reductions in the average total cost of producing a product as the firm expands the size of plant (its output) in the long run; the economies of mass production
diseconomies of scale
increases in the average total cost of producing a product as the firm expands the size of its plant (its output) in the long run
constant returns to scale
a wide range of output between the output at which economies of scale end and the output at which diseconomies of scale begin
minimum efficient scale (MES)
the lowest wage employers may legally pay for an hour of work
natural monopoly
an industry in which economies of scale are so great that a single firm can produce the product at a lower average total cost than would be possible if more than one firm produced the product