Studied by 3 people
Opportunity cost
Value of resource in best alternative use
Explicit costs
Monetary payments for use of resources owned by others
Normal profit
Cost of doing business
Economic profit
Total revenue - economic costs
Short run
Period too brief for firm to alter plant capacity, but long enough to change resources like hourly labor, raw materials, etc.
Long run
Period long enough to change quantities of all resources it employs, including plant capacity
Total product (TP)
Total output of good/service produced
Marginal product (MP)
Extra output of product with adding unit of variable resource
Average product (AP)
Output per unit of labor input
Law of diminishing returns
Successive units of variable resource added to fixed resource → Marginal product for each additional unit of variable resource will decline
Fixed costs
Aren’t affected by changes in output
Variable costs
Costs that change w/ level of output
Total cost
Total fixed costs + total variable costs
Average fixed cost (AFC)
Total fixed cost / output
Average variable cost (AVC)
Total variable cost / output
Average total cost (ATC)
Total cost / output
Marginal cost
Extra cost of producing one more unit of output
Economies of scale
Down-sloping part of long run ATC curve; as plant size increases, a number of factors will for a time lead to lower average costs of production
Diseconomies of scale
Difficulty of efficiently controlling and coordinating a firm’s operations as it becomes a large-scale producer
Constant returns to scale
Long run average cost doesn’t change
Minimum efficient scale (MES)
Lowest level of output at which a firm can minimize long-run average costs
Natural monopoly
Average total cost is minimized when only one firm produces the particular good or service
