Chapter 12 - The Cost of Production Flashcards
How do you calculate profit?
Total Revenue - Total Cost
What is total revenue?
the amount that a firm receives from the sale of goods and services
- calculated as the quantity sold multiplied by the price paid for each unit
What is total cost?
the amount that a firm pays for inputs used to produce goods or services
- includes one-time expenses
- anything and everything a company needs to make its products
How do you calculate total cost?
Fixed costs + variable costs
What are fixed costs?
costs that do not depend on the quantity of output produced.
What are variable costs?
those that depend on the quantity of output produced
- cost increase with each additional unit produced
What are explicit costs?
costs that require a firm to spend money
What are implicit costs?
costs that represent opportunities that could have generated revenue if the firm had invested its resources in another way.
- costs that represent forgone opportunities
What makes up a firm’s opportunity cost?
fixed and variable costs = explicit costs
forgone opportunities - implicit costs
What are accounting profits?
Total revenue - explicit costs
What is economic profit?
total revenue - explicit costs - implicit costs
accounting profit - implicit costs
What is a production function?
the relationship between the quantity of inputs and the resulting quantity of outputs
What is the marginal product?
the increase in output that is generated by an additional unit of input
What is the principle of diminishing marginal product?
the marginal product of an input decreases as the quantity of the input increases
How do you calculate Average Fixed Cost (AFC)?
fixed cost / quantity
