Average Fixed Cost AFC the total fixed cost divided by total output Average Physical Product APP the output per unit of resource Average total cost ATC per unit cost derived by dividing total cost by the quantity of output Average Variable Cost AVC total variable cost divided by total output Break even price A price that is equal to the minimum point of the ATC curve economic profit is zero Constant Returns to Scale when costs remain constant as the quantity of production is increased Cost of Equity the alternative returns that the shareholders could have gotten had they chosen to invest elsewhere the investor s opportunity cost Diseconomies of Scale when producing each unit of output becomes more costly as output rises we say there are diseconomies of scale Economies of Scale when producing each unit of output becomes less costly as the amount of output increases diminishes deadweight loss Equity Capital cost of ownership Firm can be sole proprietorships partnerships corporations company business and enterprise national or multinational Government intervention Government scrutiny lessens deadweight loss Local Monopoly a monopoly that exists in a limited geographic area Long Run everything is variable nothing is fixed referred to as planning horizon Long Run Average Total Cost LRATC lowest cost combinations of resources with which each level of output is produced when all resources are variable Marginal Cost additional cost of producing one more unit of output Market Structure selling environment in which a firm produces and sells its product Minimum Efficient Scale MES If the long run average total cost curve reaches a minimum the level of output at which the minimum occurs Market Power is the power to set prices Marginal Physical Product MPP the amount of additional output that is produced when one additional unit of a resource is used in combination with the same amount of other resources Marginal Revenue the additional revenue from selling one more unit of output Monopoly market structure in which there is just one firm entry by other firms is not possible and there are no close substitutes Monopolistic Competition large number of firms easy entry differentiated products mini monopoly the only producer of that specific product downward sloping demand curve Natural Monopoly A monopoly that arises from economies of scale Negative Economic Profit a firm that subtracts value whose cost of equity capital is greater than its accounting profit Oligopoly Few firms Entry more difficult firms are interdependent the demand curve downward sloping Perfect Competition market structure characterized by Many large firms Identical products easy entry demand curve horizontal Potential competition causes monopolist to lower prices lessening deadweight loss Positive Economic Profit if a firm is returning more to its owners than the owners opportunity cost Price Discrimination a firm with market power is able to charge different customers different prices Price Taker firm in a perfectly competitive market the price of the product is determined by market supply and demand they have to go along with the market price Private Company does not have its ownership shares traded on an exchange Nonetheless we can refer to the owners of a company whether the company is public or private Public Company has its shares traded on a stock exchange Regulated monopoly a monopoly firm whose behavior is overseen by a government entity Scale means size in the long run all resources are variable with 3 possible results for costs Short Run refers to any period of time during which at least one resource cannot be changed Short Run Average Total Cost SRATC the total cost of production divided by the total quantity of output produced when at least one resource is fixed Shutdown price the minimum point of the AVC curve Supply the quantities of output that sellers are willing and able to offer for sale at every price Total Costs TC the expenses a business has in supplying goods and or services Total Fixed Costs TFC payments to resources whose quantities cannot be changed during a fixed period of time the short run Total Physical Product TPP the relationship b w a variable resource and output for a given quantity of fixed resource s subject to law of diminishing marginal returns Total Variable Costs TVC payments for additional resources used as output increases Zero Economic Profit firms produce where marginal costs equals price a firm that neither adds value nor subtracts it but generates nothing in excess of this economic efficiency ATC Total Cost Total Output APP Total Output Total Input MC Change in total cost change in quantity of output MR TR Q MPP Change in Total Output Change in Total Input Supply Rule MR MC profit maximizing output level Accounting Profit PQ land cost labor cost capital cost Economic Profit accounting profit cost of equity capital Total Revenue TR price of goods and services multiplied by quantity sold PQ Profit PQ cost of land labor cost capital cost Land Rent Labor Wage Capital Interest When marginal cost is greater than average cost average cost rises ATC curve slopes up When marginal cost is below ATC then ATC falls ATC curve slopes down Market Structure Defined by 3 characteristics The number of firms in the market The ease of entry and exit of firms The degree of product differentiation GOOD TO KNOW Law of Diminishing Marginal Returns states that in all productive processes adding more of one factor of production while holding all others constant ceteris paribus will at some point yield lower per unit returns A Firm must decide 1 Which how many goods to produce 2 Which how many input to employ 3 Which it should produce from other firms Management Structure A firm in perfectly competitive industry has a perfectly elastic demand curve If the typical firm in a perfectly competitive market is experiencing an economic loss firms will exit the market and the price will increase Perfect Competition aka Price Taker