Economic Costs & Profits Flashcards

Flashcards covering key vocabulary related to economic costs and profits.

Explicit Costs

Monetary payments a firm must make to an outsider to obtain a resource, or for inputs in the production process.

Implicit Costs

Opportunity cost of self-owned, self-employed resources; the monetary income a firm sacrifices when it uses a resource it owns rather than supplying the resource in the market.

Opportunity/Economic Costs

The cost of the best alternative use of that resource; the amount of other products that must be forgone or sacrificed to produce a unit of a product.

Normal Profit

The minimum amount of profit the entrepreneur needs to get to compensate them for the risk, stress, and entrepreneurial talent to start/run the business.

Economic Profit

Total revenue less economic costs (both explicit and implicit costs); also called ‘pure profit’ and ‘above-normal profit’.

Economic Costs

The sum of explicit and implicit costs and includes a normal profit to the entrepreneur.

Accounting Profit

Equal to total revenue less accounting (explicit) costs.

Short Run

A period too brief for a firm to alter its plant capacity yet long enough to permit a change in the degree to which the fixed plant is used.

Long Run

A period long enough to adjust the quantities of all resources it employs, including plant capacity.

Total Product

the total quantity or output of a particular good or service.

Marginal Product

the additional output generated by adding one more unit of a variable resource, while keeping other resources constant.

Average Product

output per unit of labour input

law of diminishing returns

states that as additional units of a variable resource are added to a fixed resource, the marginal product of the variable resource will eventually decrease.