ch. 14 terms

industrial organization

the study of how firms’ decisions about prices and quantities depend on the market conditions they face

total revenue

amount a firm receives for the sale of its output

total revenue equation

price x quantity

total cost

market value of the inputs a firm uses in production

firm’s cost of production

includes all opportunity costs of making its output of goods and services

explicit costs

input costs that require an outlay of money by the firm

implicit costs

input costs that don’t require an outlay of money by the firm (ignored by accountants)

total costs equation

explicit costs + implicit costs

economic profit equation

total revenue - total costs (explicit and implicit)

accounting profit equation

total revenue - explicit costs

production function

the relationship between quantity of inputs used to make a good, and quantity of that good

marginal product

increase in output that arises from an additional unit of input

diminishing marginal product

marginal product of an input declines as the quantity of the input increases

total cost curve

relationship between quantity produced and total costs

fixed costs (FC)

costs that do not vary with the quantity of output produced

variable costs (VC)

costs that vary with the quantity of output produced

average fixed costs (AFC) equation

fixed costs / quantity of output

average variable costs (AVC) equation

variable costs / quantity of output

average total costs (ATC)

the cost of a typical unit of output, if total cost is divided evenly over all the units produced

average total costs (ATC) equation

total cost / total quantity

marginal cost (MC)

increase in total cost arising from an extra unit of production

marginal cost (MC) equation

change in total cost / change in quantity

efficient scale

the quantity of output that minimizes average total costs (ATC)

typical cost curve

marginal cost eventually rises with output quantity

economies of scale

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

constant returns to scale

long-run average total cost stays the same as the quantity of output changes

diseconomies of scale

long-run average total cost rises as the quantity of output increases, leads to coordination problems