Chapter 7 Flashcards
Explicit costs
Payments to non-owners of a firm for their resources.
Implicit costs
The opportunity costs of using resources owned by a firm.
Economic profit
Total revenue minus explicit and implicit costs.
Normal profit
The minimum profit necessary to keep a firm in operation. A firm that earns normal profit earns total revenue equal to its total opportunity cost.
Fixed input
Any resource for which the quantity cannot change during the period of time under consideration.
Variable input
Any resource for which the quantity can change during the period of time under consideration.
Short run
A period of time so short that there is at least one fixed input
Long run
A period of time so long that all inputs are variable.
Production function
The relationship between the maximum amounts of output that a firm can produce and various quantities of inputs.
Law of diminishing returns
The principle that beyond some point the marginal product decreases as additional units of a variable factor are added to a fixed factor.
Total fixed cost (TFC)
Costs that do not vary as output varies and that must be paid even if output is zero. These are payments that the firm must make in the short run, regardless of the level of output.
Total variable cost (TVC)
Costs that are zero when output is zero and vary as output varies.
Total cost (TC)
The sum of total fixed cost and total variable cost at each level of output.
Average fixed cost (AFC)
Total fixed cost divided by the quantity of output produced.
Average variable cost (AVC)
Total variable cost divided by the quantity of output produced.
Average total cost (ATC)
Total cost divided by the quantity of output produced.
Marginal cost (MC)
The change in total cost when one additional unit of output is produced.
Marginal-average rule
The rule states that when marginal cost is below average cost, average cost falls. When marginal cost is above average cost, average cost rises. When marginal cost equals average cost, average cost is at its minimum point.
