The situation in which a firm is earning exactly a normal rate of return.
The minimum point on a firm's average variable cost curve; if the price falls below this point, the firm shuts down production in the short run
short-run industry supply curve
The sum of the marginal cost curves (above AVC) of all the firms in an industry.
economies of scale
(increasing returns to scale) An increase in a firm's scale of production leads to lower costs per unit produced.
constant returns to scale
An increase in a firm's scale of production has no effect on costs per unit produced.
diseconomies of scale
(decreasing returns to scale) An increase in a firm's scale of production leads to higher costs per unit produced.
long-run average cost curve
The "envelope" of a series of short-run cost curves.
minimum efficient scale
The smallest size at which the long-run average cost curve is at its minimum.
Technically, the term means that the quantitative relationship between input and output stays constant, or the same, when output is increased. Constant returns to scale mean that the firm's long-run average cost curve remains flat.
optimal scale of plant
The scale of plant that minimizes average cost.
long-run competitive equilibrium
P = SRMC = SRAC = LRAC
When long-run average costs decrease as a result of industry growth
When average costs increase as a result of industry growth
long-run industry supply curve
A curve that traces out price and total output over time as an industry expands.
An industry that realizes external economies—that is, average costs decrease as the industry grows. The long-run supply curve for such an industry has a negative slope.
An industry that encounters external diseconomies—that is, average costs increase as the industry grows. The long-run supply curve for such an industry has a positive slope.
An industry that shows no economies or diseconomies of scale as the industry grows. Such industries have flat, or horizontal, long-run supply curves.
The demand for resources (inputs) that is dependent on the demand for the outputs those resources can be used to produce.
productivity of an input
The amount of output produced per unit of that input.
can be complementary or substitutable. Two inputs used together may enhance, or complement, each other.
marginal product of labor
The additional output produced by 1 additional unit of labor.
marginal revenue product
The additional revenue a firm earns by employing 1 additional unit of input, ceteris paribus. MRPL = MPL × PX
factor substitution effect
The tendency of firms to substitute away from a factor whose price has risen and toward a factor whose price has fallen.
output effect of a factor price increase
When a firm decreases (increases) its output in response to a factor price increase (decrease), this decreases (increases) its demand for all factors.
The price of a good that is in fixed supply; it is determined exclusively by what households and firms are willing to pay for the good.
The return to any factor of production that is in fixed supply.
change The introduction of new methods of production or new products intended to increase the productivity of existing inputs or to raise marginal products.