Explicit cost

a cost that involves actually laying out money

ex- food cost

Implicit cost

a cost that does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are foregone

ex-machinery operation costs

Accounting profit

a bussinesses total revenue minus the explicit cost and depreciation

ex- cost without implicit cost

Economic profit

a businesses total revenue minus the oppurtunity cost of its resources; usually less than the accounting profit

ex- one business doesn’t effect econ much, many indivduals do

Normal profit

an economic profit equal to zero; an economic profit just hight enough to keep a firm engaged in its current activity

ex- econ profit high enough to keep business open, but not make revenue

Optimal output rule

says that profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost

ex- mc=mr, most productive point

Production function

relationship between the quantity of inputs a firm uses and the quantity of output it produces

ex- determines efficiency

Fixed cost

cost that doesnt depend on the quantity of output produced; the cost of the fixed input

ex- business uses 2 pens a month

Variable cost

cost that depends on the quantity of output produced; the cost of the variable input

ex- scarf made with robot

Total cost

sum of the fixed cost and the variable cost of producing a given quantity of output

ex-profit minus amount made

Short run costs

cost price which has short-term inferences in the manufacturing procedures

ex- may lead to short term closure

Long run costs

accumulated when firms change production levels over time in response to expected economic profits or losses

ex- may lead to shut down

Minimum-cost output

quantity of output at which average total cost is lowest; corresponds to the bottom of the U-shaped average total cost curve

ex-could be more efficient, but point with least costs

Economies of scale

when long-run average total cost declines as output increases

ex- businees is becoming more efficient

Diseconomies of scale

when long-run average total cost increases as output increases

ex- business is becoming less efficient

Constant returns to scale

when output increases directly in proporton to an increase in all inputs

ex- business is becoming more efficient

Sunk cost

cost that has already been incurred and its nonrecoverable; should be ignored in a decision about future actions

ex- accident happens, need to fix roof

Price taker

individual or company that must accept prevailing prices in a market, lacking the market share to influence market price on its own

ex- farmers who have highly perfect competicion

Perfectly competitive market

market in which all market participants are price takers

ex- 2 farmers selling apples

Standardized products

describes a good produced by different firms, but that consumers regard as the same good; also known as a commodity

ex- fruits and vegtables

Free entry and exit

when new firms can easily enter into an industry and existing firms can easily leave that industry

ex- within perfectly competative markets

Break even price

the market price at which a price-taking firm earns zero profit; the minimum average total cost of such a firm

ex- most farms

Shut down price

price at which a firm ceases production in the short run, equal to the minimum average variable cost

ex- ice cream shops in cold areas