Microeconomics: Costs, Revenues, and Profits

Accounting Profit-Implicit Costs (Normal Profits)

Normal Costs

The costs that a firm is committed to in the short run, even if it produces no product. As the firm produces output, the total fixed costs remain the same (for a period of time).
Examples: A lease, contractual obligations, insurance coverage, or the opportunity cost of assets invested in the business.

Costs that increase when output increases, and decrease when output is reduced.
Examples: Labor costs, raw materials.

Dependent on a firm recognizing at least one fixed cost. Over time, a firm may eliminate certain fixed costs, but as long as it has at least one, it is considered to be in the short-run.

The period of time in which all costs are variable. Once the firm eliminates all fixed costs, it is considered to be in the long-run.

Fixed cost+Total Variable Costs

Total Fixed Cost/Output

Total Variable Cost/Output

Total Cost/Output

Average Fixed Cost+Average Variable Costs

the change in total cost as one additional unit is produced

Change in total cost/Change in output

Higher production results in lower average production costs. In other words, the more the firm produces, the lower its per-unit costs become. It is the ability of a firm to alter the quantity of all inputs; therefore it is a long-run condition. No input is fixed. The firm can continue to decrease its per unit cost for a greater range of output in the long-run because it isn't hampered by a fixed resource.

The range of production where all inputs are increased by the same percentage, in order to maintain to lowest per unit cost.

Increased production brings about a higher average cost of production. It refers to the range of production where the average cost per unit increases in the long run, despite the fact that inputs are not fixed. This occurs when a firm becomes so large that problems of efficiency occur- bureaucracy, decision-making, problems, input quality, or rising input prices.

-A perfect competitor
-A price taker that faces a perfectly elastic demand curve
-An imperfect competitor that faces a downward sloping demand curve but that cannot change different prices to different customers

Total Revenue-Total cost

the firm recognizes a profit

the firm recognizes a loss

Marginal Revenue=Marginal Cost

Derived market. This means that the product market determines the demand in the factor market.
Example: If consumers demand pizza, then firms will demand pizza labor and pizza ovens. If consumers don't have much demand for pizza, firms won't need labor or ovens

Trying to get the Marginal Revenue Product as close to the Marginal Revenue Cost without the Marginal Revenue Cost being more.
MRP=MRC

wage taker. This means that wages are determined by the market equilibrium. The firm may hire as many workers as they want, but all the workers must be payed the same wage.

The firm is not facing a perfectly competitive resource market. The firm has some market power over resources.

upward sloping supply curve, and an upward sloping marginal resource cost curve. This is because the firm has to increase the wage paid to all employees if it hires more workers.

In the production process, there is a point in which an increase in a variable factor of production will result in a decline in the additional production derived from one more unit of that factor, holding other inputs constant

TR/Q

Total Revenue-Total Cost

Average Revenue-Average Cost