Unit 3: Theory of the Firm Vocabulary

What is Accounting Profit ?

• A business's revenue minus explicit cost & depreciation.

• A business's revenue minus the opportunity cost of resources; usually LESS than the accounting profit.

What is Economic Profit ?

• A business's revenue minus explicit cost & depreciation.

• A business's revenue minus the opportunity cost of resources; usually LESS than the accounting profit.

What is Explicit Cost ?

• A cost that involves actually laying out money.

• A cost that doesn't require the outlay of money; it is measured by the value, in dollar terms, of forgone benefits.

What is Implicit Cost ?

• A cost that involves actually laying out money.

• A cost that doesn't require the outlay of money; it is measured by the value, in dollar terms, of forgone benefits.

What is Marginal Cost ?

• The additional cost incurred by producing one or more unit of a good / service.

• The additional benefit derived from producing one or more unit of a good / service.

• The additional quantity of output produced by using one or more unit of a given output.

• The change in TOTAL REVENUE generated by an additional unit of output.

What is Marginal Benefit ?

• The additional cost incurred by producing one or more unit of a good / service.

• The additional benefit derived from producing one or more unit of a good / service.

• The additional quantity of output produced by using one or more unit of a given output.

• The change in TOTAL REVENUE generated by an additional unit of output.

What is Marginal Product ?

• The additional cost incurred by producing one or more unit of a good / service.

• The additional benefit derived from producing one or more unit of a good / service.

• The additional quantity of output produced by using one or more unit of a given input.

• The change in TOTAL REVENUE generated by an additional unit of output.

What is Marginal Revenue ?

• The additional cost incurred by producing one or more unit of a good / service.

• The additional benefit derived from producing one or more unit of a good / service.

• The additional quantity of output produced by using one or more unit of a given output.

• The change in TOTAL REVENUE generated by an additional unit of output.

What is the Principle of Marginal Analysis ?

• The proposition that the optimal quantity is the quantity at which marginal benefit is equal to marginal cost.

• The proposition that each successive unit of good or service consumed adds less to total utility than did the previous unit.

What is the Principle of Diminishing Marginal Utility ?

• The proposition that the optimal quantity is the quantity at which marginal benefit is equal to marginal cost.

• The proposition that each successive unit of good or service consumed adds less to total utility than did the previous unit.