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fixed cost (constant curve)
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a cost that does not change as output is increased or decreased (can be one-time or ongoing)
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variable cost (increasing/decreasing curve)
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a cost that rises or falls depending on the quantity produced (salaries/labor, raw materials)
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zero variable cost
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if a firm produces nothing/stop production
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total cost
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the market value of the inputs a firm uses in production; one-time expenses and ongoing expenses -- fixed cost + variable cost
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total revenue
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the total amount of money a firm receives by selling goods or services
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profit
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A financial gain; (total revenue - total cost)
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revenue
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incoming money; (quantity x price) -- sum = total revenue
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opportunity cost
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true cost; cost of the next best alternative use of money, time, or resources when one choice is made rather than another
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explicit cost
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costs that require a firm to spend money; include both fixed and variable
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implicit cost
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costs that represent forgone opportunities; costs that could have generated revenue if the firm had invested its resources in another way
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accounting profit
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total revenue - explicit costs
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economic profit
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total revenue - total cost (both explicit and implicit costs)
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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 (slope of total production curve)
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the increase in output that arises from an additional unit of input
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marginal product of labor (average curve tracking additional quantity)
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the increase (steeper curve) in the amount of output from an additional unit of labor
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average product (total product/units of labor)
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the average amount produced by each unit of a variable factor of production; move in the same direction as marginal product (total product/units of labor);
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diminishing marginal product (flatten curve)
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(paribus ceteris) the marginal product of an input declines as the quantity of the input increases; as the productivity of each unit of input decreases, it costs more to get another unit of input
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average fixed cost (afc)
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fixed cost/quantity; always decreases as output increases because the same cost is spread out over more units of output
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average variable cost (avc)
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total variable costs/quantity of output; first decreases then increases, reflecting the marginal product of inputs
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average total cost (atc)
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total costs/quantity of output; sum of fixed and variable cost (u-shaped)
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profit of each unit
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price received - cost per unit
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marginal cost (mc)
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The additional cost incurred in addition of producing more unit / the variable cost of producing the next unit of output (change in total cost/change in quantity)
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marginal cost curve
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u-shaped; initially decreases (as marginal product increases) then increases (as marginal product decreases)
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intersection at the lowest point of atc and marginal cost (mc)
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- if the marginal cost o increasing production by one unit is LESS than current average total cost, then producing extra unit will DECREASE average cost
- if the marginal cost is MORE than current atc, then producing extra output will INCREASE average cost
- if the marginal cost is MORE than current atc, then producing extra output will INCREASE average cost
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costs in the short run vs long run
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cost is fixed in the short run, not fixed in the long run--all costs are variable; depends on the type of firm and production
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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 in the long run
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diseconomies of scale/decreasing returns to scale
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the property whereby long-run average total cost rises as the quantity of output increases
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constant returns to scale
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the property whereby long-run average total cost stays the same as the quantity of output changes
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scenarios of economies and diseconomies to scale (ATC curve in the long run)efficien
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- when a firm could achieve economies to scale by expanding, ATC curve slopes down (ATC decreases as output increases)
- when a firm face diseconomies to scale by expanding, the curve slopes up (ATC increases as output increases)
- constant returns to scale, curve often flat (the different levels of output the firm achieves without increasing ATC)
- when a firm face diseconomies to scale by expanding, the curve slopes up (ATC increases as output increases)
- constant returns to scale, curve often flat (the different levels of output the firm achieves without increasing ATC)
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efficient scale
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the quantity of output that minimizes average total cost; when a firm cannot lower its ATC by either increasing or decreasing the scale
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large economies of scale (entry barrier)
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some characteristic of an industry gives an advantage to larger firms (competitive market)
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