Competitive Markets

Explicit Cost

Input costs that require a direct outlay of money by the firm.

Implicit Cost

Input costs that do not require an outlay of money by the firm.

Marginal Product

The increase in output from an additional unit of input in the production process.

Diminishing Marginal Product

The decline in the marginal product of an input as the quantity of the input increases.

Average Total Cost (ATC)

Total cost divided by the quantity of output produced.

Marginal Cost (MC)

The increase in total cost from producing an additional unit of output.

Economies of Scale

Long-run average total cost falls as the quantity of output increases.

Diseconomies of Scale

Long-run average total cost rises as the quantity of output increases.

Normal Profit

The amount needed to keep factors of production in their current use.

Abnormal Profit

Profit exceeding normal profit.

Shutdown

A short-run decision not to produce due to market conditions.

Sunk Costs

Costs that have been committed and cannot be recovered.

Short-Run Supply Curve

The portion of a firm's marginal cost curve above average variable cost.

Long-Run Equilibrium

Firms operate at their efficient scale with zero economic profit.

Marginal Firm

The firm that would exit the market if the price were any lower.

Economic Profit

Measured by economists as total revenue minus total cost, including both explicit and implicit cost.

Accounting profit

Measured by accountants as the firm’s total revenue minus only the firm’s explicit costs.

X-efficiency

the failure of a firm to operate at maximum efficiency due to a lack of competitive pressure and reduced incentives to control costs.

Constant returns to scale

the property whereby long-run average total cost stays the same as the quantity of output change.