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field of Industrial Organization (IO) studies
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-A branch of economics which analyzes how firms' behavior depends on the context of the market in which they operate. - Also known as 'producer theory'
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total revenue
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Price x Quantity
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total cost
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fixed costs plus variable costs
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profit
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Profit = Total revenue - Total cost - Denoted 𝜋 = 𝑇𝑅 − 𝑇C
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Explicit costs
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input costs that require an outlay of money by the firm (financial costs, also known as accounting costs)
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implicit costs
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input costs that do not require an outlay of money by the firm (hidden/opportunity costs)
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the distinction between accounting and economic profits
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accounting profit is normally larger than economic profit
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what a production function is
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Shows the amount of output (𝑞) that the firm can produce using various amounts of the variable input, labor (𝐿).
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what marginal product is
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Shows the extra output (∆𝑞) that arises from an additional unit of the variable input labor (∆𝐿) • 𝑀𝑃𝐿 =
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the principle of diminishing marginal product is and why it arises
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the property whereby the marginal product of labor declines as the quantity of labor increases - Reason: overcrowding of workers when capital (e.g. factory space) is fixed
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total cost curve is
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• Shows the relationship between the total cost of production (𝑇𝐶) and the amount of output (𝑞)
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Fixed costs (𝐹𝐶)
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costs that do not vary with the quantity of output produced - Incurred even if the firm produces zero output - E.g. rent
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variable costs (𝑉c)
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costs that vary with the quantity of output produced - equal zero if no output is produced - E.g. cost of coffee beans, milk and sugar for a coffee shop
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average total cost
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Average total cost (𝐴𝑇𝐶) - shows the cost of producing a typical unit of output
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Average variable cost (𝐴𝑉𝐶)
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𝐴𝑉𝐶 = 𝑉𝐶/𝑞
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Marginal cost
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shows the extra cost (∆𝑇𝐶) that arises from an additional unit of output (∆𝑞)
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Economies of scale
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factors that cause a producer's average cost per unit to fall as output rises
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Diseconomies of scale
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the property whereby long-run average total cost rises as the quantity of output increases
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