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Inputs and Outputs
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-To earn profit, firms must make products (output)
- Inputs are resources used to make outputs
- Input resources are also called factors
- Inputs are resources used to make outputs
- Input resources are also called factors
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Total Physical Product (TP)
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Total output or quantity produced
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Marginal Product (MP)
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The additional output generated by additional inputs (workers)
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Marginal Product
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Change in Total Product/ Change in Inputs
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Average Product (AP)
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The output per unit of input
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Average Product
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Total Product/ Units of Labor
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The Law of Diminishing Marginal Returns
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As variable resources (workers) are added to fixed resources (machinery, tool,etc.), the additional output produced from each worker will eventually fall
-A.K.A. Too many cooks in the kitchen
-A.K.A. Too many cooks in the kitchen
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What are the three stages of returns?
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Stage 1: Increasing marginal returns
Why? MP rising. TP increasing at an increasing rate Why? Specialization
Stage 2:Decreasing Marginal Returns. MP falling. TP increasing at a decreasing rate. Why? Fixed resources. Each worker adds less
Stage 3: Negative Marginal Returns. Why? MP is negative. TP decreasing. Workers get in each others way
Why? MP rising. TP increasing at an increasing rate Why? Specialization
Stage 2:Decreasing Marginal Returns. MP falling. TP increasing at a decreasing rate. Why? Fixed resources. Each worker adds less
Stage 3: Negative Marginal Returns. Why? MP is negative. TP decreasing. Workers get in each others way
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Accountants
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Accountants look at only explicit costs
- Explicit costs(out of pocket costs) are payments paid by firms for using the resources of others
-Example: Rent. wages, materials, and electricity bills
- Explicit costs(out of pocket costs) are payments paid by firms for using the resources of others
-Example: Rent. wages, materials, and electricity bills
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Accounting Profit
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Total Revenue- Accounting Cost (Explicit Only)
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Economist
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-Look at both explicit and implicit costs
-Implicit costs are the opportunity costs that firms "pay" for using their own resources
Example: Forgone wage, forgone rent, and time
-Implicit costs are the opportunity costs that firms "pay" for using their own resources
Example: Forgone wage, forgone rent, and time
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Economic Profit
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Total revenue- Economic Cost(Explicit + Implicit )
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Short Run
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At least one fixed resource is xed
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In the long run
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All resources are variable
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Fixed Cost
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Cost for fixed resources that don't change with the amount produced
Ex: Rent, insurance, and mangers salaries
Ex: Rent, insurance, and mangers salaries
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Average Fixed Cost
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Fixed Costs/ Quantity
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Variable COsts
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Costs for variable resources that DO change as more or less is produced
Ex: Raw Materials, Labor, Electricity
Ex: Raw Materials, Labor, Electricity
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Average Variable Costs
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Variable Costs/ Quantity
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Total cost
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Sum of fixed cost and variable costs
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Average Total Cost
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Total Costs/ Quantity
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Marginal Cost
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Additional costs of an additional output
* Change in Total Costs/ Change in Quantity
* Change in Total Costs/ Change in Quantity
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What is the relationship between ATC and AVC
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ATC AND AVC get closer and closer but NEVER touch
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Why is the MC curve U-shaped?
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-When marginal product is increasing, marginal cost fall
- When marginal product falls, marginal cost increase
-MP and MC are mirror images of eachother
- The MC curve falls and then rises because of diminishing marginal returns
- When marginal product falls, marginal cost increase
-MP and MC are mirror images of eachother
- The MC curve falls and then rises because of diminishing marginal returns
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Marginal Cost
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ChangeTC/ChangeQ
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Why is the ATC curve U- shaped?
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-When the marginal cost is below the average, it pulls the average down
- When the marginal cost is above the average, it pulls the average up
- The MC curve intersects the ATC curve at is lowest point:
-Example: The average income in the room is $50,000
- When the marginal cost is above the average, it pulls the average up
- The MC curve intersects the ATC curve at is lowest point:
-Example: The average income in the room is $50,000
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