question
Total Revenue
answer
Amount firm recieves from sale of goods/services
TR = (Q)(P)
TR = (Q)(P)
question
Total Costs
answer
Amount firm pays for all inputs towards production
• Includes one time expense (machines)
• Includes ongoing expenses (rent, employee salaries, raw materials, advertising)
• Includes one time expense (machines)
• Includes ongoing expenses (rent, employee salaries, raw materials, advertising)
question
Profit
answer
Total revenue - total cost
Revenue = (Q)(P)
Total Costs = (Fixed Cost) + (Variable Cost)
Revenue = (Q)(P)
Total Costs = (Fixed Cost) + (Variable Cost)
question
Fixed Costs
answer
Costs that don't depend on quantity of output produced
• Can incur both at one-time or ongoing
• Always present, even if company isn't producing
• Can incur both at one-time or ongoing
• Always present, even if company isn't producing
question
Variable Costs
answer
Depend on the quantity of output produced
• Include raw materials & labour costs
• 0 when there is no production
• Include raw materials & labour costs
• 0 when there is no production
question
Explicit & Implicit Costs : Opportunity Costs
answer
Value of what you give up in order to get something
Explicit Costs:
• Fixed & Variable costs
Implicit Costs
• Represent forgone opportunities that could have generated revenue if the firm had invested its resources in another way
Explicit Costs:
• Fixed & Variable costs
Implicit Costs
• Represent forgone opportunities that could have generated revenue if the firm had invested its resources in another way
question
Explicit Costs
answer
Fixed costs + variable costs
question
Accounting Profit
answer
Total revenue - explicit costs
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Economic Profit
answer
Total revenue - explicit costs - implicit costs
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Production Function
answer
Relationship quantity of inputs and quantity of outputs
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Marginal Product
answer
Marginal product of any input to the production process is the increase in output that is generated by an additional unit of input
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Principle of Production : Diminishing Marginal Product
answer
Principle states that marginal product of an input decreases as the quantity of the input increases
Increasing slope of total cost curve
Increasing slope of total cost curve
question
Average Fixed Cost (AFC) & Cost Curves
answer
Fixed cost ÷ Quantity
AFC Cost curves
- trends downward
- Fixed costs remain the same as production increases
- Fixed cost per unit of production decreases
AFC Cost curves
- trends downward
- Fixed costs remain the same as production increases
- Fixed cost per unit of production decreases
question
Average Variable Cost (AVC) & Cost Curves
answer
Variable Cost ÷ Quantity
AVC Cost Curves : U-Shaped
- First few employees have increasing marginal product
- AVC curve slope downwards
- When principle diminishing marginal product kicks in: curve slopes upward
AVC Cost Curves : U-Shaped
- First few employees have increasing marginal product
- AVC curve slope downwards
- When principle diminishing marginal product kicks in: curve slopes upward
question
Average Total Cost (ATC) & Cost Curves
answer
Total Cost ÷ Quantity
ATC Cost Curves : U-Shape
- First few employees have increasing marginal product
- ATC cost curve slope downwards
- Principle of Diminishing Marginal Product Kicks in: Curve slopes upward
ATC Cost Curves : U-Shape
- First few employees have increasing marginal product
- ATC cost curve slope downwards
- Principle of Diminishing Marginal Product Kicks in: Curve slopes upward
question
Total Cost Curve
answer
Average Cost Curves
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Marginal Cost (MC)
answer
Change in total cost ÷ Change in quantity
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Marginal & Average Cost Curves
answer
- Marginal cost curve intersects average total cost curve at its lowest point
question
Costs in the Long Run
answer
Considers the sale at which they want to operate: move to bigger or smaller premises? Build more factories, close some down?
question
Economies of Scale
answer
Returns that occur when an increase in the quantity of output decreases average total cost (ATC)
Increasing firms scale results in lowered average costs
Increasing firms scale results in lowered average costs
question
Diseconomies of Scale
answer
Returns that occur when an increase in the quantity of output increases average total cost (ATC)
Increasing firms scale results in increases in average costs
Increasing firms scale results in increases in average costs
question
Constant Returns to Scale
answer
Various scales does not causes higher or lower average costs
question
Long-Run ATC Curve : Diseconomies of Scale
answer
- In long run : ATC curve slopes down : ATC decreases as output increases
- Flat portion in the middle : Different levels of output at which firm achieves constant returns to scald
- Diseconomies of scale in expanding : curve slopes up : ATC increases as output increases
- Flat portion in the middle : Different levels of output at which firm achieves constant returns to scald
- Diseconomies of scale in expanding : curve slopes up : ATC increases as output increases
question
Efficient Scale
answer
When firm cannot lower its average cost by either increases/decreasing its scale
- Producing quantity of output at which ATC is minimized
- Is called "large economies of scale" : some characteristics of that industry gives an advantage to larger firms
- Producing quantity of output at which ATC is minimized
- Is called "large economies of scale" : some characteristics of that industry gives an advantage to larger firms
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