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Economics Ch. 7

Key Terms

QuestionAnswer
Economic Costs Payment that must be made to obtain and retain the services of a resource Economic Costs= Explicit Costs + Implicit Costs
Explicit Costs monetary payment a firm must make to an outsider to obtain a resource.
Implicit Costs monetary income that a firm sacrifices when it uses a resource it owns rather than supplying the resource in the market
Accounting Profit Profit numbers that accountants calculate by subtracting total explicit costs from total sales revenue.
Normal Profit payment made by a firm to obtain and retain entrepreneurial ability.
Economic Profit The total revenue of a firm less its economic costs (explicit and implicit) also called pure profit.
Law of Diminishing Returns Principle in that as successive increments of a variable resource are added to a fixed resource the marginal product of the variable resource will eventually decrease.
Economies of Scale Reductions in the average total cost of producing a produc as the firm expands the size of its plant
Diseconomies of Scale Increases in the average total cost of producing a product as the firm expands the size of its plant
Constant returns to scale Unchanging average total cost of producing a product as a firm expands the size of its plant
Natural Monopoly industry in which economies of scale are so great that a single firm can produce the product at a lower average total cost than would be possible if more than one firm produced the product
Minimum Efficient Scale Lowest level of output at which a firm can minimize long run average total cost
Created by: abreus1