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Total Cost
answer
the sum of fixed and variable costs
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Fixed Cost
answer
Costs that do not change as output changes and are independent of level of output (rent, interest payments, insurance premiums, etc.) (total cost- variable cost, AFC * Q)
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Variable Cost
answer
Costs that rise as output rises, and falls as output falls; has a direct relationship to level of output (wages materials, power, etc.) (total cost- fixed cost, AVC * Q)
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Average Total Cost
answer
Total Cost / Quantity
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Average Fixed Cost
answer
Fixed Costs / Quantity
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Average Variable Cost
answer
Variable Costs / Quantity
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Shut Down Decision
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When marginal revenue is below the minimum of the average variable cost curve. In detail: the firm must pay its fixed costs, regardless of whether it produces any output. Thus, the firm will focus on its AVC in determining whether to shut down.
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Accounting Profit/Loss
answer
Total Revenue (Price * Quantity) - Explicit Costs
When positive it is a profit, and when negative it is a loss
When positive it is a profit, and when negative it is a loss
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Economic Profit/Loss/Zero
answer
Total Revenue (Price * Quantity) - (Implicit Costs + Explicit Costs)
When positive it is a profit, when negative it is a loss, and when it equals 0 it is a zero economic profit (normal profit)
When positive it is a profit, when negative it is a loss, and when it equals 0 it is a zero economic profit (normal profit)
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Normal Profits
answer
Total revenue equal to the explicit and implicit costs of production (when the economic profit is 0)
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Characteristics of a Perfectly Competitive Market
answer
1) Many buyers and sellers
2) Standardized Product
3) Price takers
4) Free entry and exit
5) Perfect information
6) Firms are profit maximizers (MC=MR)
2) Standardized Product
3) Price takers
4) Free entry and exit
5) Perfect information
6) Firms are profit maximizers (MC=MR)
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Perfectly Competitive firm in the long run
answer
- Earn zero economic profits (normal profits)
- MC=MR at min of ATC
- Allocatively Efficient (MC=P)
- Technically Efficient (P=ATC min)
- MC=MR at min of ATC
- Allocatively Efficient (MC=P)
- Technically Efficient (P=ATC min)
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Total Revenue
answer
Price x Quantity
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Total Productivity
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Total quantity of good or service that is produced
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Marginal Productivity
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As you add an extra unit of input (labor), it is the additional units produced (change in TP / change in input (labor))
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Average Productivity
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Total quantity / number of laborers
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Law of Diminishing Marginal Productivity
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As more labor is applied, at some point marginal productivity will fall, and total product will increase at a decreasing rate
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Economies of Scale
answer
- Downward sloping part of the average total cost curve
- Can spread out startup costs over a large quantity
- makes workers more productive
- Can hire more workers (% change in input < % change in output)
- Can spread out startup costs over a large quantity
- makes workers more productive
- Can hire more workers (% change in input < % change in output)
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Diseconomies of Scale
answer
- Upward sloping part of average total cost
- Average costs rises as output rises
- Rising management costs
- Loss of team morale
- Should reduce the size of business (% change in input > % change in output)
- Average costs rises as output rises
- Rising management costs
- Loss of team morale
- Should reduce the size of business (% change in input > % change in output)
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Constant Returns to Scale
answer
- Minimum horizontal portion of average total cost curve
- Average costs stay constant as output rises
- % change input = % change output
- Business can continue to grow production without experiencing rising costs
- Average costs stay constant as output rises
- % change input = % change output
- Business can continue to grow production without experiencing rising costs
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Profit Maximizing
answer
MC=MR
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Allocative Efficiency
answer
A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it (MC = P)
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Technical Efficiency
answer
a production process uses as few inputs as possible to produce a given level of output (P = ATC min)
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Marginal Cost
answer
the increase in total cost that arises from an extra unit of production
(TC2- TC1)
(TC2- TC1)
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