Microeconomics Chapter 9 Businesses & the Costs of Production

Payment that must be made to obtain and retain the services of a resource; income a firm must provide to resource suppliers to attract resources away from alternate uses; equal to the quantity of other products that can't be produced when resources are instead used to make a particular product

Explicit: monetary payments to those from whom a firm must purchase resources that it doesn't own. Remember: explicit costs are opportunity costs because every monetary payment used to purchase outside resources necessarily involves forgoing the best alternatives that could have been purchased with money.
(*real costs - out of pocket expenses/things you can show receipt for.)

Implicit: opportunity costs of using the resources a firm already owns to make the firm's own product rather than selling those resources to outsiders for cash. These costs are present but not obvious, therefore they are referred to as implicit costs
(*non-monetary costs - made up/no money leaves bank acct. Ex. depreciation)

Normal Profit (Accounting) - Break even:
• payment made by a firm to obtain and retain entrepreneurial ability;

• the minimum income that entrepreneurial ability must receive to induce entrepreneurs to provide their entrepreneurial ability to a firm;

• level of accounting profit at which a firm generates an economic profit of zero after paying for entrepreneurial ability

• Acct. Profit = Revenue - Explicit Costs

Economic Profit:
• return flowing to those who provide the economy with the economic resources of entrepreneurial ability

• total revenue of a firm less its economic costs (includes explicit & implicit cost)

• also called "pure profit" and "above normal profit"

• Economic profit = Revenue - Explicit Costs - Implicit Costs

• *directs how resources are allocated in the economy

Short run = Period too brief for a firm to alter its plant capacity, yet long enough to permit a change in the degree to which the plant's current capacity is used. Existing plant capacity used more or less intensively for short run capacity solution. "Fixed-plant period"

Long run = Period long enough for a firm to adjust the quantities of all the resources it employs, including plant capacity. Also includes time for existing firms to exit the industry or new firms to enter. "Variable-plant period"

Total Product (TP): total quantity/output, of a particular good/service produced
# units can be produced; complete production (all resources)

Marginal Product (MP): extra output/added product associated w/ adding a unit
of a variable resource, ex. labor, to production process
MP = change in total product / change in labor input

Average Product (AP): labor productivity, output per unit of labor input

Assumes technology is fixed (production techniques do not change)

As successive units of a variable resource (say, labor) are added to a fixed resource (say, capital or land), beyond some point the extra, or marginal product that can be attributed to each additional unit of the variable resource will decline.

Ex. As additional workers are hired, return on investment will decline as number of hires grows.

FC
• Any cost that in total does not change when the firm changes its output.
• Associated with the very existence of a firm's plant and therefore must be paid even if its output is zero
(Ex. rental payments, debt interest, equipment & building depreciation)

VC
• Cost that increases when the firm increases its output and decreases when the firm reduces its output
(Ex. materials, fuel, power, transportation services, and most labor)

FC + VC = TC

AFC = dividing total fixed cost (TFC) by the amount of output (Q)

AVC = dividing total variable cost (TVC) by that amount of output (Q)

ATC = dividing total cost (TC) by that output (Q)

How much will it cost to make the next unit (one more unit)

Extra (additional) cost of producing 1 more unit of output

Equal to the change in total cost divided by the change in output (and, in the short run, to the change in total variable cost divided by the change in output)

A cost that has been incurred and can't be recovered (fully or partially)

Ex. advertising resulting in no new customers, house inspection and don't buy house

Economic impact: Don't always get a return on your investment

Marginal-cost curve MC intersects both the AVC and the ATC curves at their respective minimum points.

EoS = Efficiency

Situation when a firm's average total cost of producing a product decreases in the long run as the firm increases the size of its plant (and hence its output)

As production goes, costs decrease

Larger we get, the more efficient we become theoretically

Specialization also reduces cost

DoS = Inefficiencies

Situation when a firm's average total cost of producing a product increases in the long run as the firm increases the size of its plant (and hence its output)

Can get so big, one part doesn't know what the other is doing.

Costs start going back up

Long term avg cost will go up

MES:

• smallest amount of effort (judgement calls) to keep average production costs down (long term)

• lowest level of output at which a firm can minimize long-run average total cost