Vocabulary
Fixed Cost
Cost that does not change with output.
Formula for average total cost.
ATC = TC ÷ Q
What happens to AFC as output increases?
It decreases
Condition a perfectly competitive firm uses to choose output.
MR = MC
When firms earn economic profit, what happens in the long run?
Firms enter the industry
Implicit Cost
Opportunity cost of using your own resources.
Formula for marginal cost.
MC = ΔTC ÷ ΔQ
What happens to marginal cost when marginal product decreases?
Marginal cost increases
In perfect competition, price equals what?
Marginal revenue
When firms earn economic losses, what happens in the long run?
Firms exit the industry
Minimum Efficient Scale
Output level where long-run average total cost is minimized.
Formula for accounting profit.
Accounting Profit = TR − Explicit Costs
In what time period is at least one input fixed?
Short run
If P > ATC, the firm earns what?
Economic profit
Type of profit firms earn in long-run equilibrium.
Normal profit
Marginal Product
Additional output from hiring one more worker.
Formula for economic profit.
Economic Profit = TR − Explicit Costs − Implicit Costs
Where does MC intersect ATC?
At ATC’s minimum point
If P < ATC but P > AVC, what should the firm do?
Continue producing (operate at a loss)
When LRATC decreases as output increases.
Economies of scale
Economic Profit
Profit including both explicit and implicit costs.
Formula for average variable cost.
AVC = TVC ÷ Q
What happens to ATC when MC is above ATC?
ATC rises
The firm’s short-run supply curve is which cost curve?
MC above AVC
When LRATC increases as output increases.
Diseconomies of scale