OPPORTUNITY COST: Cost associated with opportunities that are forgone when a firms resources are no put to their

best alternative use.

ECONOMIC COST: Cost to firm of utilizing economic resources in production, including opportunity cost.

EXPLICIT COST: A business expense that is easily identified and accounted for. Explicit costs represent clear, obvious cash outflows from a business that reduce its bottom-line profitability. This contrasts with less-tangible expenses such as goodwill amortization, which are not as clear cut regarding their effects on a business's bottom-line value

IMPLICIT COST: A cost that is represented by lost opportunity in the use of a company's own resources, excluding cash. The implicit cost for a firm can be thought of as the opportunity cost related to undertaking a certain project or decision, such as the loss of interest income on funds, or depreciation of machinery used for a capital project.

NORMAL PROFIT:
When economic profit is equal to zero; this occurs when the difference between total revenue and total cost (explicit and implicit costs) equals zero. Normal profit is different than accounting profit because opportunity cost is taken into consideration. Normal profit is the minimum level of profit needed for a company to remain competitive in the market.

ECONOMIC PROFIT:
The difference between the revenue received from the sale of an output and the opportunity cost of the inputs used. This can be used as another name for "economic value added" (EVA).

SHORT RUN:
Period of time in which quantities of one or more production factors can not be changed.

LONG RUN:
Amount of time needed to make all production inputs variable.

TOTAL PRODUCT:
The total quantity of output produced by a firm for a given quantity of inputs. Total product is the foundation upon which the analysis of short-run production for a firm is based. The usual framework is to analyze total product when a variable input (labor) changes, while a fixed input (capital) does not change. Two related concepts derived from total product are average product and marginal product. EXAMPLE: The average physical product is the total production divided by the number of units of variable input employed. It is the output of each unit of input. If there are 10 employees working on a production process that manufactures 50 units per day, then the average product of variable labour input is 5 units per day. output increases as more inputs are employed up until point A. The maximum output possible with this production process is Qm. (If there are other inputs used in the process, they are assumed to be fixed.)

MARGINAL PRODUCT:
Additional output produced as an input is increased by one unit known as MARGINAL PRODUCT OF LABOR (MPL). Marginal product of labor = change in output/change in labor input=q/L

EXAMPLE: The relationship between inputs and outputs (the production technology) expressed numerically or mathematically is called a production function or total product function. The table below illustrates a production function for a small sandwich shop. We assume that all the sandwiches are grilled, and that the firm has only one grill, which can accommodate only two workers comfortably.

. It shows as more workers are added, the total product (sandwiches per hour) increases, up to a maximum of 42 sandwiches per hour. but as the number of labor unit increases. when the second worker is added, total product increases from 10 to 25, a change of 15. But when the third worker is added, total product increases from 25 to 35, which is only a change of 10. And this continues, until finally, the 6th worker adds nothing to total product. Here the marginal product labor increases then decreases. This is due to the law of diminishing returns, which states that, in the short run, as you continue to add a variable input to a fixed input, at some point the additional output from the variable input will decline. In this example, diminishing returns set in when the third worker is added.

AVERAGE PRODUCT:
Output per unit of a particular input is called as average product of labor (APL). The average product of labor measures the productivity of the firms workforce in term of how much output each worker produces on average. Average product of labor = output / labor input = q/L EXAMPLE: In the above example, when labor unit becomes 2, the total product becomes 25 and average product is gotten by 25/2 =12.5. The average product increases initially but falls when labor input becomes greater than two.

TOTAL COST (TC or C):

Total economic cost of production, consisting of fixed and variable cost. TC = FC + VC

FIXED COST (FC):

Cost that does not vary with the level of output and that can be eliminated only by shutting down.

VARIABLE COST (VC):

Cost that varies as output varies known as variable cost. EXAMPLE:

The company Mickey & Sons Company produces stuffed amigos. The column to the left presents the quantity of Stuffed amigos produced each minute, ranging from 0 to 10 stuffed animals. The column to the right then presents the total cost incurred in this production, ranging from a low of $3 to a high of $46. If, for example, 5 Stuffed Amigos rolls off the assembly line per minute, then the total cost incurred in their production is $16. The production of 9 Stuffed Amigos, in comparison, incurs a total cost of $34. If the company incurs a fixed level of "overhead expenses" that include administrative salaries, interest on the loan used to buy capital equipment, and rent on the building. Whether The Mickey & sons Company produces one Stuffed Amigo or one million Stuffed Amigos, this fixed cost does not change. The table above indicates that Mickey & sons Company incurs $3 of fixed cost each minute of production, which is the cost incurred if production is zero. And it incurs variable cost when it hires a different number of workers or buys a different quantity of material inputs, both of which are done as it changes the quantity of output produced. That is, if The Mickey & sons Company wants to produce more Stuffed Amigos, then it must buy more materials and

hire more workers. The table above indicates any cost greater than $3 per minute incurred by The Mickey & sons Company is variable cost.

AVERAGE TOTAL COST (ATC):

An average cost or average economic cost is the firms total cost divided by its level of output.i.e TC/q.

Here, Thus the total cost of producing five units is rps.36 that is, 180/5.basically, average total cost tells us the per-unit cost of production.

AVERAGE FIXED COST (AFC):

Fixed cost divided by the level of level of output. i.e. FC/q. in the above example, the average fixed cost for producing 4 units of output is RS. 12.50 (RS 50/4). Because fixed cost is constant, average fixed cost declines the rate of output increases.

AVERAGE VARIABLE COST (AVC):

Variable cost divided by the level of output. i.e. VC/q in this example , the average variable cost for producing 5 units of output is RS.26 that is RS.130/5.

MARGINAL COST (MC): It is also sometimes called incremental cost. It is the increase in cost resulting from he production of one extra unit of output. MC = VC/q = TC/q In the above example, the marginal cost of increasing output from from 2 to 3 units is RS.20 because the variable cost of the firm increases from RS.78 to RS.98. (the total cost of production also increases by RS.20. from Rs.128 to RS.148. total cost differs from variable cost only by fixed cost, which by definition does not change as output changes.)

ECONOMIES OF SCALE:
Situation in which output can be doubled for less than a doubling of cost.

DISECONOMIES OF SCALE:
Situation in which doubling of output requires more than a doubling of cost.