Economics: Profit Maximization Vocab
Average Total Cost (ATC)
total costs divided by quantity of output
Average Fixed Cost (AFC)
total fixed cost divided by total output
Economic Profit
total revenue minus total cost, including both explicit and implicit costs
Accounting Profit
total revenue minus total explicit cost
Average Variable Cost (AVC)
variable cost divided by the quantity of output
Explicit Costs
Direct, actual payments. Input costs that require an outlay of money by the firm. (ex: electricity bill)
Profit Maximization
The process of obtaining the highest possible level of profit through the production and sale of goods and services occurs when marginal revenue equals marginal cost.
Total Cost (TC)
Total fixed costs plus total variable costs.
Average Revenue (AR)
Total revenue divided by quantity, or TR/q; in all market structures, _______equals the market price
Price Taker
A buyer or seller that is unable to affect the market price.
Fixed Cost (FC)
A cost that does not change with an increase or decrease in the amount of goods or services produced.
Profit
A financial gain, esp. the difference between the amount earned and the amount spent in buying, operating, or producing something total revenue minus total cost
Exit
A long-run definition to leave the market; firm that leaves the market.
Shutdown
A short-run decision not to produce anything because of market conditions. The combination of output and price where a firm earns just enough revenue to cover its total variable costs.
Variable Cost (VC)
Any production cost that changes as the rate of output changes.
Marginal Cost (MC)
Increase in total cost from producing one more unit. change in total cost / change in quantity
Implicit Costs
Input costs that do not require an outlay of money by the firm. (ex: the use of the owner's car, computer, or other personal equipment to conduct business.)
Total Revenue (TR)
Profit received by a firm for the sale of its output. price times quantity sold: P X Q
Marginal Revenue (MR)
The increase in revenue that results from the sale of one additional unit of output. divide the change in total revenue by the change in output quantity.
