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short run
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one input is fixed, all the others can be varied
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long run
answer
all inputs can be varied
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Accounting costs
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monetary costs
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Economic Costs
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cost plus all of the opportunity costs and potential losses
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Accounting costs and economic costs differ because
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Economic costs include implicit costs and accounting costs do not.
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accounting profit equation
answer
total revenue - explicit costs
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economic profit equation
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accounting profit - opportunity cost
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Total Product Equation
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total product = total output
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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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marginal cost curve
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MC decreases at first due to specialization and an increasing MP --> increases due to diminishing returns and decreasing marginal product.
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fixed costs
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costs that remain constant as output changes
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variable costs
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costs that change as output changes
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total costs
answer
fixed costs + variable costs
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marginal cost
answer
the cost of producing one more unit of a good
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marginal cost equation
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change in total cost / change in quantity
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average variable cost equation
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AVC = VC/Q
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average total cost equation
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total cost/quantity
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average fixed cost equation
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fixed cost/quantity
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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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total revenue equation
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TR = P x Q
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Marginal Revenue
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the additional income from selling one more unit of a good; sometimes equal to price
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marginal revenue equation
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MR = change in TR / change in Q
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profit mazimization
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MC = MR
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economies of scale
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long run ATC decreases as output increases
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diseconomies of scale
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long run ATC increases as output increases
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sunk cost
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a cost that has already been paid and cannot be recovered
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productive efficiency
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a situation in which a good or service is produced at the lowest possible cost
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Where is productive efficiency?
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MC =ATC
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allocative efficiency
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the particular mix of goods and services most highly valued by society
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Where is allocative efficiency?
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P=MC
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Shut Down Position
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P < minimum AVC
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Loss Minimizing Position
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P>AVC and P< ATC
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perfectly elastic demand curve
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horizontal line --> MR = D = AR = P
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In order to operate in the short run, the firms total revenue must
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cover its variable costs
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Long Run Adjustments
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- If firms are earning economic profits, new firms will want to enter the industry
- This will reduce the demand curve facing each individual producer
- In the long run, each supplier will earn normal profits, and price will equal ATC
- This will reduce the demand curve facing each individual producer
- In the long run, each supplier will earn normal profits, and price will equal ATC
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Per unit tax or subsidy affects
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Variable Costs
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Lump - sum tax or subsidy affects
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only fixed costs
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