A cost that requires an actual outlay of money, such as wages, materials, or rent paid to others.

The value of benefits forgone, which involves no money changing hands, such as the salary an owner gives up by running his or her own business.

Total revenue minus explicit costs and depreciation; the profit figure used for taxes and financial statements.

Total revenue minus both explicit and implicit costs; a truer measure of whether a business is worth running than accounting profit.

The income an owner forgoes by tying up his or her own money in the business instead of investing it elsewhere.

An economic profit of exactly zero, meaning the business just covers all costs including implicit ones, so the owner does as well as in the next-best alternative.

The rule that the best quantity of an activity is the one at which the marginal benefit of the last unit equals its marginal cost.

The additional revenue a firm earns from selling one more unit of output.

A firm maximizes profit by producing the quantity at which marginal revenue equals marginal cost.

A graph of how the cost of producing one more unit changes as output rises; it usually slopes upward.

A graph showing a firm's marginal revenue at each level of output.

The relationship between the quantity of inputs a firm uses and the quantity of output it can produce.

An input whose quantity cannot be changed during the relevant time period.

An input whose quantity the firm can adjust as it changes its output.

The time period long enough that all inputs, including those fixed in the short run, can be varied.

The time period during which at least one of a firm's inputs is fixed.

A graph showing how total output depends on the amount of the variable input, holding all other inputs fixed.

The extra output generated by adding one more unit of an input.

As more of a variable input is added while others stay fixed, each additional unit eventually raises output by less than the previous unit did.

A cost that does not vary with output and must be paid even when the firm produces nothing.

A cost that rises and falls with the quantity of output the firm produces.

The sum of fixed cost and variable cost at a given level of output.

A graph of how total cost increases with output; it grows steeper as diminishing returns set in.

Total cost divided by the quantity produced; the per-unit cost of output, also called average cost.

Average total cost usually falls and then rises as output increases, tracing out a U shape.

Fixed cost divided by output; it declines as output rises because the fixed cost is spread over more units (the spreading effect).

Variable cost divided by output; it tends to increase with output because of diminishing returns (the diminishing-returns effect).

At low output the spreading effect of falling average fixed cost dominates, while at high output the rising average variable cost from diminishing returns dominates.

The output level at which average total cost is lowest, at the bottom of the U-shaped curve, where the marginal cost curve crosses it.

A curve showing the lowest average total cost attainable at each output level once all inputs can be adjusted.

A situation, also called increasing returns to scale, in which long-run average total cost falls as output rises, often due to large fixed setup costs or specialization.

A situation, also called decreasing returns to scale, in which long-run average total cost rises as output rises, often from the difficulty of managing a very large firm.

A situation in which long-run average total cost stays the same as output changes.

A cost already incurred that cannot be recovered; because it is unrecoverable, it should be ignored when deciding what to do next.

A firm whose output decisions have no effect on the market price, so it treats the price as fixed and beyond its control.

A buyer whose purchases are too small to influence the market price.

A market in which all buyers and sellers are price-takers.

An industry in which every firm is a price-taker.

The fraction of total industry output produced by a particular firm.

A good that buyers view as identical regardless of who makes it, so they don't care which firm they buy from.

The condition that firms can enter or leave an industry without major obstacles; a typical feature of perfectly competitive industries.

A market controlled by a single seller (a monopolist) of a good that has no close substitutes.

Something that keeps other firms out of an industry and lets a monopoly persist, such as control of a scarce resource, economies of scale, technological superiority, or legal protection.

A case in which one firm can supply the entire market at lower average cost than several firms could, because of large economies of scale.

A temporary legal monopoly giving an inventor the exclusive right to make and sell a new product for a set time.

A legal monopoly granting the creator of an original written, musical, or artistic work exclusive rights over it.

A market structure with only a few sellers, called oligopolists, each large enough to affect the market.

A market structure between perfect competition and monopoly in which firms compete but each holds some power over price.

A measure of market power equal to the combined market share of the largest few firms in an industry.

A measure of industry concentration calculated by summing the squares of each firm's percentage market share.

A market with many firms selling differentiated products, with free entry and exit in the long run.

Making a product distinct from competitors' offerings through differences in style or type, location, or quality.

Adding more programmers to a delayed software project can actually slow it further, a well-known illustration of diminishing returns to labor.