Chapter 8 Notes + Vocab

Total fixed cost

Cost of the fixed inputs (equals sum of quantity times unit price for each fixed input)

Total variable cost

Cost of the variable inputs (equals sum of quantity times unit price for each variable input)

Fixed cost

Cost that is independent of the output level

Variable cost

Cost that varies with the output level

sunk costs

Costs that have already been incurred as a result of past decisions. They are sometimes referred to as historical costs.

economies of scale

Reductions in the firm's per-unit costs associated with the use of large plants to produce a large volume of output.

TC=

TFC + TVC

AFC

TFC / q

AVC

TVC / q

marginal cost

The change in total cost required to produce an additional unit of output.

total costs

The costs, both explicit and implicit, of all the resources used by the firm. Total cost includes a normal rate of return for the firm's equity capital.

Economic profit

The difference between the firm's total revenues and its total costs, including both the explicit and implicit cost components.

law of diminishing returna

The hypothesis that as more and more units of a variable resource are combined with fixed amount of other resources, using additional units of the variable resource will eventually increase output only at decreasing rate. Once diminishing returns are reached, it will take successively larger amounts of variable factor to expand output by one unit.

marginal product

The increase in the total product resulting from a unit increase in the employment of a variable input. Mathematically, it is the ratio of the change in total product to the change in the quantity of the variable input.

implicit costs

The opportunity costs associated with a firm's use of resources that it owns. These costs do not involve a direct money payment. examples include wage income and interest forgone by the owner of a firm who also provides labor services and equity capital to the firm.

opportunity cost of equity capital

The rate of return that must be earned by investors to induce them to supply financial capital to the firm.

accounting profits

The sales revenues minus the expenses of a firm over a designated time period, usually one year. Accounting profits typically make allowances for changes in the firm's inventories and depreciation of its assets. No allowance is made, however, for the opportunity cost of the equity capital of the firm's owners, or other implicit costs.

total fixed cost

The sum of the costs that do not vary with output. They will be incurred as long as a firm continues in business and the assets have alternative uses.

total variable cost

The sum of those costs that rise as output increases. examples of variable costs are wages paid to workers and payments for raw materials.

total product

The total output of a good that is associated with each alternative utilization rate of a variable input.

average product

The total product (output) divided by the number of units of the variable input required to produce that output level.

average variable cost

The total variable cost divided by the number of units produced.

Average total cost

Total cost divided by the number of units produced. It is sometimes called per-unit cost.

constant returns to scales

Unit costs that are constant as the scale of the firm is altered. neither economics nor diseconomies of scale are present.

normal profit rate

Zero economic profit, providing just the competitive rate of return on the capital (and labor) of owners. An above-normal profit will draw more entry into the market, whereas a belownormal profit will lead to an exit of investors and capital.

explicit costs

Payments by a firm to purchase the services of productive resources.

MC=

(triangle) TC / (triangle) q

proprietorship

A business firm owned by an individual who possesses the ownership right to the firm's profits and is personally liable for the firm's debts.

corporations

A business firm owned by shareholders who possess ownership rights to the firm's profits, but whose liability is limited to the amount of their investment in the firm.

partnership

A business firm owned by two or more individuals who possess ownership rights to the firm's profits and are personally liable for the debts of the firm.

long run

A time period long enough to allow the firm to vary all of its factors of production.

short run

A time period so short that a firm is unable to vary some of its factors of production. The firm's plant size typically cannot be altered in the short run.

ATC

AFC + AVC