Fixed costs are those that remain constant in total over a given range of output.
Marginal cost is the increase in total cost resulting from the production of one more unit of output.
Marginal revenue and marginal cost will always be equal.
The law of diminishing marginal productivity is applicable only to the use of labor as a factor of production.
Average product can be defined as the output per unit of input.
Implicit costs are recognized by accountants as part of the real cost of production.
Implicit costs involve a direct cash payment for the use of a resource.
All other things constant, higher implicit costs result in lower accounting profit.
If all my savings are invested in my consulting company, an increase in interest rates increases implicit costs.
The graph of average fixed cost is a horizontal line.
In the long run, all of a firm's inputs are variable.
In the short run, all costs are fixed.
In the long run, all inputs are variable.
The marginal cost curve intersects the average variable cost curve at its minimum.
If a firm experiencing "economies of scale" decreases its output, its long-run average cost will decrease.
If a firm is experiencing diseconomies of scale, its long-run marginal cost curve is upward sloping.
Profits are maximized where average cost and average revenue are equal.
Since all costs are variable in the long run period, the firm must cover all costs to stay in business.
An individual seller or buyer can influence the market price under conditions of pure competition.
Pure profits tend to be a temporary phenomenon under conditions of pure competition.
If marginal cost is less than marginal revenue, an expansion of output will decrease profit.
Under pure competition, average revenue and marginal revenue will always be equal.
The marginal cost curve should cross the AVC and the ATC curves at their lowest points.
Under conditions of pure competition, price eventually will equal cost at the lowest point of the long-run ATc curve at the optimum scale of operation.
The short-run price in pure competition is generally considered a stable price because all firms can at least break even.
Profits are dynamic in pure competition insofar as they are constantly changing in amount and among firms.
When a firm has reached the optimum scale of operation, no further cost advantages arise from the greater size.
One of the disadvantages of pure competitioon is the possible waste associated with the duplication of plant and equipment.
An equilibrium price results in the "clearing of the market."
Perfect competition is characterized by a large number of differentiated products.
Average variable cost will drop, reach a minimum, and begin to rise with increasing output.
A necessary condition associated with the law of diminishing marginal productivity is that only one factor should be varied.
Profit maximization for a firm depends upon demand conditions, as well as upon productivity and costs.
An industry consists of all firms that supply output to a particular market.
Perfectly competitive firms are sometimes called price makers because they have significant control over product price.
In perfect competition, each firm's output is a large fraction of total market supply.
Because it is small relative to the market, a perfectly competitive firm faces an inelastic demand curve for its output.
If a perfectly competitive firm raises its price, its sales decreases to zero.
For a perfectly competitive firm, price is identical to marginal revenue at every quantity.
Marginal revenue is the change in total revenue from selling one more unit of output.
A firm with positive accounting profit may be suffering an economic loss.
If a perfectly competitive firm shuts down in the short run, its variable cost equals zero.
When marginal revenue equals marginal cost, the firm just "breaks even."
In the long run in perfect competition, no firm can earn a normal profit.
After an increase in demand in a constant-cost industry, firms will find themselves with higher average cost curves.
If, as a result of a change in demand in a perfectly competitive increasing-cost industry, price and quantity rise, demand must have risen.
A market is said to be allocatively efficient when the marginal cost of producing each good equals the marginal benefit that consumers derive from that good.
a firm's total revenue minus its explicit costs
average total cost
total cost divided by output, or ATC = TC/q; the sum of average fixed cost and average variable cost, or ATC = AFC + AVC
average variable cost
variable cost divided by output, or AVC = VC/q
constant long-run average cost
a cost that occurs when, over some range of output, long-run average cost neither increases nor decreases with changes in firm size
diseconomies of scale
forces that may eventually increase a firm's average cost as the scale of operation increases in the long run
a firm's total revenue minus its explicit and implicit costs
economies of scale
forces that reduce a firm's average cost as the scale of operation increases in the long run
opportunity cost of resources employed by a firm that takes the form of cash payments
any production cost that is independent of the firm's rate of output
any resource that cannot be varied in the short run
a firm's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment
increasing marginal returns
the marginal product of a variable resource increases as each additional unit of that resource is employed
law of diminishing marginal returns
as more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative
a period during which all resources under the firm's control are variable
long-run average cost curve
a curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies; also called the planning curve
the change in total cost resulting from a one-unit change in output; the change in total cost divided by the change in output, or MC = Δ TC/Δq
the change in total product that occurs when the use of a particular resource increases by one unit, all other resources constant
minimum efficient scale
the lowest rate of output at which a firm takes full advantage of economies of scale
the accounting profit earned when all resources earn their opportunity cost
the relationship between the amount of resources employed and a firm's total product
a period during which at least one of a firm's resources is fixed
the sum of fixed cost and variable cost, or TC = FC + VC
a firm's total output
any production cost that changes as the rate of output changes
any resource that can be varied in the short run to increase or decrease production
the condition that exists when firms produce the output most preferred by consumers; marginal benefit equals marginal cost
total revenue divided by quantity, or AR = TR/q; in all market structures, average revenue equals the market price
a standardized product, a product that does not differ across producers, such as bushels of wheat or an ounce of gold
an industry in which each firm's long-run average cost curve does not shift up or down as industry output changes
golden rule of profit maximization
to maximize profit or minimize loss, a firm should produce the quantity at which marginal revenue equals marginal cost; this rule holds for all market structures
industries in which firms encounter higher average costs as industry output expands in the long run
long-run industry supply curve
a curve that shows the relationship between price and quantity supplied by the industry once firms adjust in the long run to any change in market demand
marginal revenue (MR)
the firm's change in total revenue from selling an additional unit; a perfectly competitive firm's marginal revenue is also the market price
important features of a market, such as the number of firms, product uniformity across firms, firm's ease of entry and exit, and forms of competition
a market structure with many fully informed buyers and sellers of a standardized product and no obstacles to entry or exit of firms in the long run
a firm that faces a given market price and whose quantity supplied has no effect on that price; a perfectly competitive firm that decides to produce must accept, or take, the market price
a bonus for producers in the short run; the amount by which total revenue from production exceeds variable cost
the condition that exists when production uses the least-cost combination of inputs; minimum average cost in the long run
short-run firm supply curve
a curve that shows how much a firm supplies at each price in the short run; in perfect competition, that portion of a firm's marginal cost curve that intersects and rises above the low point on its average variable cost curve
short-run industry supply curve
a curve that indicates the quantity supplied by the industry at each price in the short run; in perfect competition, the horizontal sum of each firm's short-run supply curve
the overall well-being of people in the economy; maximized when the marginal cost of production equals the marginal benefit to consumers