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what happens if a firm fails to maximize its profit
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firm is either eliminated or taken over by another firm that seeks to maximize profit
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accounting profit
answer
measure a firm's profit to ensure that the firm pays the correct amount of tax and to show its investors how their funds are being used
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profit formula
answer
total revenue - total cost
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economics accounting
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measure a firm's profit to enable them to predict the firm's decisions, and the goal of these decisions is to maximize economic profit
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firm's opportunity cost of production
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value of the best alternative use of the resources that a firm uses in production
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firm's opportunity cost of production is the sum of the cost of using what resources
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1. bought in the market
2. owned by the firm
3.supplied by the firm's owner
2. owned by the firm
3.supplied by the firm's owner
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explicit costs
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out-of-pocket costs for a firm - for example payments, wages/salaries, rent or materials
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implicit costs
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specific type of opportunity cost: the cost of resources already owned by the firm that could have been put to some other use
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accounting profit formula
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total revenue - total explicit costs
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normal profit
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cost of entrepreneurship and is an opportunity cost of production
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short-run decisions
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involves any time horizon over which at least one of the firm's inputs cannot be varied
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long-run decisions
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involves a time horizon long enough for a firm to vary all of its inputs
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in the short run firms cannot...
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do anything about their fixed inputs
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fixed inputs
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quantity must remain constant, regardless of how much output is produced
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variable inputs
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usage can change as the level of output changes
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total product
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total output of any productive process
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average product
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total product / number of workers
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marginal product
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the extra total product associated with an additional worker, tells us the rise in output produced when one more worker is hired
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MP formula
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MP = change in TP / change in L
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law of diminishing return
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as more of a variable input is added to a fixed input in the production process, the resulting increase in output will, at some point, begin to diminish
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short-run technology
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increasing marginal returns arise from increased specialization and division of labour
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when MP exceeds AP...
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AP increases
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when MP is below AP...
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AP decreases
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when MP = AP...
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AP is at its maximum
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short-run cost
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to produce more output in the short run, the firm must employ more labour, which means that it must increase its costs
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three concepts and three types of cost curves are
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1. total cost
2. marginal cost
3. average cost
2. marginal cost
3. average cost
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total cost (TC)
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cost of all resources used
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total fixed cost (TFC)
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the cost of the firm's fixed inputs, do not change with output
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total variable cost (TVC)
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the cost of the firm's variable inputs, do not change with output
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total cost formula
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TC = TFC + TVC
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the shapes of a firm's cost curves are determined by...
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technology it uses
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average fixed cost (AFC)
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total fixed cost per unit of output
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average variable cost (AVC)
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total variable cost per unit of output
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average total cost (ATC)
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total cost per unit of output
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ATC formula
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ATC = AFC + AVC
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long-run cost
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in the long run, all inputs are variable and all costs are too
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the production function
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relationship between the max output attainable and the quantities of both capital and labour
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diminishing marginal product of capital
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increase in output resulting from a one-unit increase in the amount of capital employed, holding constant the amount of labour employed
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long-run average cost curve
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relationship between the lowest attainable average total cost and output when both the plant and labour are varied
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what else can the long-run average cost curve be called
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planning curve that tells the firm the plant that minimizes the cost of producing a given output range
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minimum efficient scale
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smallest quantity of output at which the long-run average cost reaches its lowest level
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