EKN Chapter 4 Flashcards
Opportunity cost
The amount of other products that must be forgone or sacrificed to produce a unit of a product.
Explicit cost
The monetary payment a firm must make to an outsider to obtain a resource.
Implicit cost
The monetary income a firm sacrifices when it uses a resource it owns rather than supplying the resource in the market; equal to what the resource could have earned in the best-paying alternative employment; includes a normal profit.
Normal profit
The payment made by a firm to obtain and retain entrepreneurial ability; the minimum income entrepreneurial ability must receive to induce it to perform entrepreneurial functions for a firm
Economic profit
The total revenue of a firm less its economic costs (which include both explicit costs and implicit costs); also called ‘pure profit’ and ‘above-normal profit’.
Total product
The total output of a particular good or service produced by a firm.
Marginal product
The additional output produced when one additional unit of a resource is employed; equal to the change in total product divided by the change in the quantity of a resource employed.
Average product
The total output produced per unit of a resource employed.
Law of diminishing returns
The principle that, as successive increments of a variable resource are added to a fixed resource, the marginal product of the variable resource will eventually decrease.
Fixed cost
Any cost that in total does not change when the firm changes its output; the cost of fixed resources.
Variable cost
A cost that in total increases when the firm increases its output and decreases when the firm reduces its output.
Total cost
The sum of fixed cost and variable cost.
Average fixed cost
A firm’s total fixed cost divided by output.
Average variable cost
A firm’s total variable cost divided by output.
Average total cost
A firm’s total cost divided by the output; equal to average fixed cost plus average variable cost.
