Ch. 11-12

Long Run

The time it takes for substantial new investment and entry to occur.

Short Run

The period before entry occurs.

Sunk Cost

A cost that once incurred cannot be recovered.

Explicit Cost

A cost that requires a money outlay.

Implicit Cost

A cost that does not require an outlay of money.

Accounting Profits

Total revenue minus explicit costs.

Economic Profits

Total revenue minus total costs including implicit opportunity costs.

Profit

Total Revenues (TR)

Price times quantity sold: TR= P * Q

Total Cost

The costs of producing a given quantity of output.

Variable Costs

Costs that vary with output.

Marginal Revenue

The change in total revenue from selling an additional unit; for a firm in a competitive industry, MR=Price.

Average Cost

The cost per unit; the total cost of producing a given quantity divided by the quantity, AC = TC/Q

Profit

Zero Profits

The condition when P=AC; at this price the firm is covering all of its costs including enough to pay labor and capital their ordinary opportunity costs.

Increasing Cost Industry

An industry in which the costs of production increase with greater output; shown with an upward-sloped supply curve.

Constant Cost Industry

An industry in which cost of production do not change with greater industry output; shown with a flat supply curve.

Decreasing Cost Industry

An industry in which the costs of production decrease with an increase in industry output; shown with a downward-sloped supply curve.

Elimination Principle

The principle that in a competitive market, above normal profits are eliminated by entry and below normal profits are eliminated by exit.