Chapter 22 Key Terms McConnell and Brue 14th Edition
economic (opportunity) cost
A payment which must be made to obtain and retain the services of a resource; the income a firm must provide to a resource supplier to attract the resource away from an alternative use; equal to the quantity of other products which cannot be produced when resources are instead used to make a particular product.
explicit costs
The monetary payment a firm must make to an outsider to obtain a resource.
implicit costs
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.
normal profit
The payment made by a firm to obtain and retain entrepreneurial ability; the minimum income which entrepreneurial ability must receive to induce it to perform entrepreneurial functions for a firm.
economic profit
The total revenue of a firm less all its economic costs; also called “pure profit” and “above normal profit.”
short run
(1) In microeconomics a period of time in which producers are able to change the quantity of some but not all of the resources they employ; a period in which some resources (usually plant) are fixed and some are variable. (2) In macroeconomics a period in which nominal wages and other input prices do not change in response to a change in the price level.
long run
(1) In microeconomics a period of time long enough to enable producers of a product to change the quantities of all the resources they employ; period in which all resources and costs are variable and no resources or costs are fixed. (2) In macroeconomics a period sufficiently long for nominal wages and other input prices to change in response to a change in the nation’s price level.
total product
The total output of a particular good or service produced by a firm (or a group of firms or the entire economy).
marginal product
The additional output produced when one additional unit of a resource is employed (the quantity of all other resources employed remaining constant); 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 (total product divided by the quantity of that employed resource).
law of diminishing returns
As successive increments of a variable resource are added to a fixed resource the marginal product of the variable resource will eventually decrease.
fixed costs
Any cost which in total does not change when the firm changes its output; the cost of fixed resources.
variable costs
A cost which in total increases when the firm increases its output and decreases when it 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 (the quantity of product produced).
average variable cost
A firm’s total variable cost divided by output (the quantity of product produced).
average total cost
A firm’s total cost divided by output (the quantity of product produced); equal to average fixed cost plus average variable cost.
marginal cost
The extra (additional) cost of producing one more unit of output; equal to the change in total cost divided by the change in output (and in the short run to the change in total variable cost divided by the change in output).
economies of scale
Reductions in the average total cost of producing a product as the firm expands the size of plant (its output) in the long run; the economies of mass production.
diseconomies of scale
Increase in the average total cost of producing a product as the firm expands the size of its plant (its output) in the long run.
constant returns to scale
A situation wherein long-run average cost does not change. A given percentage increase in all outputs will cause a proportionate percentage increase in output. In this range, ATC remains constant.
minimum efficient scale (MES)
The lowest level of output at which a firm can minimize long-run average costs.
natural monopoly
An industry in which economies of scale are so great the product can be produced by one firm at a lower average total cost than if the product were produced by more than one firm.