Opportunity cost - Value of resource in best alternative use

Explicit costs - Monetary payments for use of resources owned by others

Implicit costs - Opportunity costs of using self-owned/self-employed resources; monetary payments that resources could’ve earned in best alternative use

Accounting profit ignores implicit costs + overstates economic success

Normal profit - Cost of doing business

Economic costs = Explicit costs + implicit costs

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

• Slope of total product curve

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

Marginal product greater than average product → Average product increasing

Fixed costs - Aren’t affected by changes in output

• Must be paid even if output is zero

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

• Graph’s shape is consequence of law of diminishing returns

Marginal cost less than average total cost → ATC falls

Changes in resource prices or technology → Costs change and cost curves shift

• Discovery of new technology → Productivity of all inputs increase

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

• Labor specialization - Increased specialization in the use of labor becomes more achievable as a plant increases in size

• Managerial specialization - Large-scale production also means better use of, and greater specialization in, management

• Efficient capital - Large-scale producers have a high volume of production, resulting in effective use of equipment

Diseconomies of scale - Difficulty of efficiently controlling and coordinating a firm’s operations as it becomes a large-scale producer

• Expansion of management hierarchy → Communication + cooperation problems

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