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breaking even

The situation in which a firm is earning exactly a normal rate of return.

shutdown point

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.

constant returns

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


external economies.

When long-run average costs decrease as a result of industry growth

external diseconomies

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.

decreasing-cost industry

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.

increasing-cost industry

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.

constant-cost industry

An industry that shows no economies or diseconomies of scale as the industry grows. Such industries have flat, or horizontal, long-run supply curves.

derived demand

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.

demand-determined price

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.

pure rent

The return to any factor of production that is in fixed supply.

technological change

change The introduction of new methods of production or new products intended to increase the productivity of existing inputs or to raise marginal products.

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