Economics: Profit Maximization Vocab

Average Total Cost (ATC)

total costs divided by quantity of output

Profit

A financial gain, esp. the difference between the amount earned and the amount spent in buying, operating, or producing something

total revenue minus total cost

Marginal Cost (MC)

Increase in total cost from producing one more unit.

change in total cost / change in quantity

Fixed Cost (FC)

A cost that does not change with an increase or decrease in the amount of goods or services produced.

Average Variable Cost (AVC)

variable cost divided by the quantity of output

Variable Cost (VC)

Any production cost that changes as the rate of output changes.

Average Fixed Cost (AFC)

total fixed cost divided by total output

Total Cost (TC)

Total fixed costs plus total variable costs.

Marginal Revenue (MR)

The increase in revenue that results from the sale of one additional unit of output.

divide the change in total revenue by the change in output quantity.

Profit Maximization

The process of obtaining the highest possible level of profit through the production and sale of goods and services

occurs when marginal revenue equals marginal cost.

Average Revenue (AR)

Total revenue divided by quantity, or TR/q; in all market structures, _______equals the market price

Total Revenue (TR)

Profit received by a firm for the sale of its output.

price times quantity sold: P X Q

Explicit Costs

Direct, actual payments. Input costs that require an outlay of money by the firm.
(ex: electricity bill)

Implicit Costs

Input costs that do not require an outlay of money by the firm.
(ex: the use of the owner's car, computer, or other personal equipment to conduct business.)

Exit

A long-run definition to leave the market; firm that leaves the market.

Accounting Profit

total revenue minus total explicit cost

Economic Profit

total revenue minus total cost, including both explicit and implicit costs

Price Taker

A buyer or seller that is unable to affect the market price.

Shutdown

A short-run decision not to produce anything because of market conditions. The combination of output and price where a firm earns just enough revenue to cover its total variable costs.