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total cost
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the market value of the inputs a firm uses in production
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total revenue
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The amount a firm receives for the sale of its output.
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profit
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total revenue minus total cost
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Explicit cost
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input cost that requires an outlay of money by the firm
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implicit cost
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Input costs that does not require an outlay of money (opportunity cost) by the firm.
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For an accountant the calculation would be
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profit= total revenue-explicit costs
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For an economist the calculation would be
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profit= total revenue-implicit costs
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The production function
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the relationship between quantity of inputs used to make a good and the quantity of output of that good
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marginal product
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the increase in output that arises from an additional unit of input
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variable cost
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Costs related to the output produced are the variable costs. Variable cost is zero when there is no output produced. Labor cost and cost of other inputs are the examples of variable costs.
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fixed cost
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Cost that are independent if the level of output. Fixed cost is there even if the output produced is zero. Money spent on factory, machinery are the examples of fixed cost.
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total cost
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the sum of fixed and variable costs
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Law of Diminishing Marginal Returns
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When a variable factor (labor) is added incrementally to a fixed factor (capital), the marginal product of the variable factor eventually declines.
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Average total cost calculation
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total cost/quantity
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average fixed cost calculation
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fixed cost/quantity
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average variable cost calculation
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variable cost / quantity
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marginal cost calculation
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change in TC/change in Q
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short run
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a period in which at lest one factor of production (Usually capital) is fixed
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Long-run
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a period that is sufficient to enable all factors of production to be adjusted or changed.
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Very long run
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a period sufficiently long enough for a new technology to develop.
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increasing returns to scale
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When all inputs are increased, the output increases more than proportionately. Because of this economies of scale, the long-run average total cost falls as the quantity of output increases.
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decreasing returns to scale
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When all inputs are increased, the output increases less than proportionately. That is, the long-run average total cost rises as the quantity of output increases as a result of diseconomies of scale.
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constant returns to scale
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When all inputs are increased, the output increases proportionately. That is, the long-run average total cost stays the same as the quantity of output changes.
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efficient production
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