Chapter 11: Costs and Profit Maximization Under Competition

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

Fixed costs

Costs that do not vary with the quantity produced

Explicit Cost

A cost that requires a money outlay

Implicit cost

A cost that does not require an outlay of money

Accounting profit

Total Revenue - Explicit Costs

Economic Profit

Total Revenue minus total costs including implicit opportunity costs

Total Revenue

Price times quantity sold: TR=P x Q

Total Cost

The costs of producing a given quantity of output.

Total Cost (TC) = Fixed Costs (FC) + Variable Costs (VC)

Variable Costs

Costs that vary with output

Marginal Revenue, MR

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

Marginal Cost, MC

The change in total cost from producing an additional unit. MR=MC

Average Cost, AC

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

Zero (normal) 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 costs 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.