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production function
answer
relationship between input and output
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types of costs
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-explicit costs: tangible (bills)
-implicit costs: intangible (sacrifices)
-fixed costs: does not change from change in output
-variable costs: change from change in output
-implicit costs: intangible (sacrifices)
-fixed costs: does not change from change in output
-variable costs: change from change in output
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diminishing marginal returns
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after a point of maximum specialization (division of labor), additional units of a variable input into a fixed input results in less additional output (decreased marginal product)
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the short run
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the period of time in which at least one input is fixed
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the long run
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the period of time that production contains at least one variable input
-no diminishing marginal returns
-variable inputs only, no fixed
-no diminishing marginal returns
-variable inputs only, no fixed
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economic costs
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explicit costs + implicit costs
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economic profit
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total revenue - economic cost
-making 0$ of this is good bc that means you're covering all your costs, but it is ideal for it to be positive
-making 0$ of this is good bc that means you're covering all your costs, but it is ideal for it to be positive
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accounting profit
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total revenue - accounting (explicit) costs
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marginal product curve
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-increasing: specialization
-peak: diminishing marginal returns set in, causing the following decrease
-peak: diminishing marginal returns set in, causing the following decrease
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total product curve
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-increase: specialization
-peak and decrease: diminishing marginal returns
-peak and decrease: diminishing marginal returns
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marginal cost curve
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shows how the cost of producing one more unit depends on the quantity that has already been produced
-individual firm's supply curve
-individual firm's supply curve
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costs in the short run
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-fixed costs: do not change from change in output (contains implicit costs)
-variable costs: change from change in output
-total cost: sum of fixed and variable costs
-marginal cost: how much it would cost to make one more of a product
-variable costs: change from change in output
-total cost: sum of fixed and variable costs
-marginal cost: how much it would cost to make one more of a product
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production function curve facts
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-marginal product must intersect average product at average product's peak
-when marginal product is at 0, total product reaches its peak
-pull factor: when marginal product is above average product, it pulls average product up
-three stages of returns: increasing, decreasing, negative marginal product
-when marginal product is at 0, total product reaches its peak
-pull factor: when marginal product is above average product, it pulls average product up
-three stages of returns: increasing, decreasing, negative marginal product
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short run average cost curves
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-marginal cost has pull factor on average total cost (ATC) and average variable cost (AVC)
-gap between ATC and AVC shows average fixed cost (AFC) and gets smaller as you move right
-marginal cost must intersect ATC and AVC at minimum
-AFC never reaches zero
-gap between ATC and AVC shows average fixed cost (AFC) and gets smaller as you move right
-marginal cost must intersect ATC and AVC at minimum
-AFC never reaches zero
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profit maximizing rule
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MR=MC
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MRDARP
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-marginal revenue: each additional revenue per unit of output
-demand: price is determined by demand
-average revenue: equal to marginal revenue because the line is constant
-price: price of good
-demand: price is determined by demand
-average revenue: equal to marginal revenue because the line is constant
-price: price of good
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short run costs (profit)
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costs less to make each unit that you sell each unit for
-ATC minimum is below MRDARP
-ATC minimum is below MRDARP
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short run costs (loss)
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costs more to produce a unit than earned per unit
-ATC minimum above MRDARP
-ATC minimum above MRDARP
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short run costs (shutdown)
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shutdown point: a company should stop producing if MRDARP intersects MC below AVC
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short run vs long run
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-short run: at least one fixed cost, diminishing marginal returns are present (marginal cost curve is present in graph, so you can find profit maximizing point)
-long run: no fixed costs (all variable), no diminishing marginal returns (no marginal cost curve is present in graph so can't find profit maximizing point)
-long run: no fixed costs (all variable), no diminishing marginal returns (no marginal cost curve is present in graph so can't find profit maximizing point)
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long run costs (long run atc)
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large series of short run ATCs
-economics of scale: first section of curve, business gets bugger, production gets cheaper
-constant returns: middle kinda section of curve, increase in production results on proportionate returns
-diseconomies of scale business gets bigger, production gets more expensive
-causes: need to import resources, communication complications, more government regulations, lack of motivation in workers
-economics of scale: first section of curve, business gets bugger, production gets cheaper
-constant returns: middle kinda section of curve, increase in production results on proportionate returns
-diseconomies of scale business gets bigger, production gets more expensive
-causes: need to import resources, communication complications, more government regulations, lack of motivation in workers
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side by side market and firm graphs (short run profit)
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MRDARP is set by the market price
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side by side market and firm graphs (long run profit)
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if there are profits, more firms enter, shifting supply right, shifting market price down and therefore MRDARP down to breaking even
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types of taxes and subsidies
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-per unit: for each product produced the price of the tax/subsidy increase (increase in Q, increase in tax/subsidy)
-shifts MC curve (affects profit maximizing quantity
-lump sum: based on the total produced (one time)
-shifts the ATC curve (affects profit)
-shifts MC curve (affects profit maximizing quantity
-lump sum: based on the total produced (one time)
-shifts the ATC curve (affects profit)
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