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Production function
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The amount of output produced depends upon the inputs, specifies the maximum output which can be produced given inputs
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Firm's goal
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maximize profit
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Accounting cost
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actual payments made by a firm in a period
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An accountant measures
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cost and profit to ensure that the firm pays the correct amount of income tax and to show the bank how the firm has used its loan
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An economist
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predicts the decisions that a firm makes to maximize its profit, these decisions respond to opportunity cost and economic profit
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Explicit cost
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a cost paid in money
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Implicit cost
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an OC incurred by a firm when it uses a factor of production for which it does not make a direct money payment
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Economic depreciation
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an OC of a firm using capital that it owns, change in value over a period of time
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Normal profit
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the cost of entrepreneur not running another firm
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Economic profit
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total revenue minus total cost, total cost = explicit + implicit
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Accounting profit
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total revenue minus total explicit cost
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Opportunity cost
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amount lost by not using a resource in its best alternative
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Short run
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a time frame in which the quantities of some resources are fixed
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Long run
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a time frame in which the quantities of all resources can be changed
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Short run production
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increasing the quantity of labor in a fixed plant
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Total product
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the total quantity of a good produced in a given period, number of units produced per unit of time, increases as quantity of labor employed increases, separates attainable and unattainable points, technology is constant
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Marignal product
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the change in total product that results from a one-unit increase in the quantity of labor employed, = change in total product/change in quantity of labor, steeper the TP curve greater this is
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Increasing marginal returns
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occurs when the MP of an additional worker exceeds the MP of the precious worker, specialization
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Decreasing marginal returns
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occurs when the MP of an additional worker is less than the MP of the previous worker, less productivity due to fixed plant size
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Average product
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the total product per worker employed, total product/quantity of labor, productivity
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When marginal product is less than average product
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average product is decreasing
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When marginal product equals average product
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average product is at its maximum
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Short run cost
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to produce more output in short run, a firm employs more labor, meaning it will increase its costs
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Total cost
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the cost of all the factors of production the firm uses
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Total fixed cost
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the cost of a firm's fixed factors of production - land, capital, and entrepreneurship, doesn't change as output changes
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Total variable cost
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the cost of the variable factor of production used by a firm - labor, changes as output changes
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Marginal cost
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the change in total cost that results from a one-unit increase in total product, tells us how total cost changes as total product changes, curve is u-shaped and intersects AVC and ATC at their minimum points
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Average total cost
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total cost/unit of output, AFC + AVC, curve is u-shaped: spreading total fixed cost over larger output (so decreasing), decreasing marginal returns (so increasing)
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Technology changes that increases productivity
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shifts the total product curve, marginal product curve, and average product curve upward. lowers average and marginal costs, shifts the short-run cost curves downward
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An increase in rent or another component of fixed cost
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shifts the fixed cost curves upward, shifts the total cost curve upward, leaves the variable and marginal cost curves unchanged
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An increase in the wage or another component of variable cost
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shifts the variable curves upward, shifts the marginal cost curve upward, leaves the fixed cost curves unchanged
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Economies of scale
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exists when a firm increases its plant size and labor by the same percentage, its output increases by a larger percent and average total cost decreases, greater specialization
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Diseconomies of scale
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exist when a firm increases its plant size and labor by the same percentage, its output increases by a smaller percentage and average total cost increases, arises from the difficulty of coordinating and controlling a large enterprise
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Constant returns to scale
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exist when a firm increases its plant size and labor by the same percentage, its output increases by the same percentage and average total cost remains constant, when a firm is able to replicate existing conditions
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Perfect competition
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firms sell an identical product to many buyers, no restrictions on entry or exit, established firms have no advantage over new firms, sellers and buyers are well informed about prices
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Monopoly
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a market for a good or service that has no close substitutes, no competition because no firms cannot enter
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Oligolopy
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a market in which a small number of firms compete
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Monopolistic competition
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a large number of firms compete by making similar but slightly different products
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price taker
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a buyer or seller that is unable to affect the market price
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Total revenue
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the market price x quantity sold
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Marginal revenue
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the change in total revenue from a one-unit increase in quantity sold
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Using total revenue and total cost curves to find max profit
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where total revenue exceeds total cost by the largest amount, as quantity increases economic profit increases reaches a maximum and then decreases
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Using marginal analysis to find max profit
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as output increases, marginal revenue remains constant but marginal cost increases
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If marginal revenue exceeds marginal cost
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the extra revenue from selling one more unit exceeds the extra cost incurred to produce it, economic profit increases if output increases
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If marginal revenue is less than marginal cost
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the extra revenue from selling one more unit is less than the extra cost incurred to produce it, economic profit increases if output decreases
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If marginal revenue equals marginal cost
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the extra revenue from selling one more unit is equal to the extra cost incurred to produce it, economic profit is maximized
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If a firm shuts down temporarily
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it incurs an economic loss equal to total fixed cost.
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If a firm produces some output
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it incurs an economic loss equal to total fixed cost + total variable costs - total revenue
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If total revenue exceeds total variable cost
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the firm's economic loss is less than total fixed cost
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If total revenue were less than total variable cost
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the firm's economic loss would exceed total fixed cost, so the firm would shut down temporarily
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Firm's shutdown point
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when price equals minimum average variable cost
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