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Economic Cost
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the value of all resources used to produce a good or service; opportunity cost
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Accounting Cost
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The explicit costs of production (explicit payment)
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Why is a firm satisfied with zero economic cost?
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Their resources are being used as efficiently as possible and could not be producing more profit elsewhere. The opportunity cost of not using their resources elsewhere is equal to the benefit from their current resource allocation.
ECONOMIC PROFIT = total revenue - implicit and explicit costs
ECONOMIC PROFIT = total revenue - implicit and explicit costs
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short-run
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the period of time during which at least one of a firm's inputs is fixed (assumed to be capital)
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long-run
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the time period in which all inputs can be varied
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*know short run cost of production graph*
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*know short run cost of production graph*
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What does the short run production function show?
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the relationship between the amount of labor used and the quantity of output
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Law of Diminishing Marginal Returns
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As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative
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Marginal cost
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= deltaC / deltaQ
= W(age) / MPL (marginal product of labor)
= W(age) / MPL (marginal product of labor)
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Avg cost
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cost/Q
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Economies of scale - long run cost possibility
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long run average costs fall with quantity
- because productivity grows with quantity
- because productivity grows with quantity
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Diseconomies of scale - long run cost possibility
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long run avg costs rise with quantity
- because productivity falls with quantity
- because productivity falls with quantity
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Constant returns to scale - long run cost possibility
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long run avg costs are constant (don't change with quantity)
- because productivity constant with quantity
- because productivity constant with quantity
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Competitive Market
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- many buyers and sellers
- buyers and sellers are both price-takers
- buyers and sellers are both price-takers
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How is price-taking represented on a graph?
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horizontal demand curve
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Short run supply curve
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A supply curve that shows the quantity of a product a firm in a purely competitive industry will offer to sell at various prices in the short run; the portion of the firm's short-run marginal cost curve that lies above its average-variable-cost curve.
*a firm will not offer products below the AVC because producing at this point would result in further loss and the firm would rather shut down
*a firm will not offer products below the AVC because producing at this point would result in further loss and the firm would rather shut down
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where does profit max. occur in short-run?
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where MR=MC
(for a competitive firm MR=P=D)
(for a competitive firm MR=P=D)
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Short run shut down occurs where?
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If price is less than AVC
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*Be able to identify profits/losses and costs/revenues on diagrams of competitive firms*
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*Be able to identify profits/losses and costs/revenues on diagrams of competitive firms*
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Marginal Product of Labor
answer
deltaQ / deltaL
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