Chapter 13 - Production Costs Flashcards
Profit
Profit = Total Revenue - Total cost
Explicit Costs
Explicit costs require an outlay of money.
Ex: paying wages to workers
Implicit Costs
Implicit Costs do not require a cash outlay.
Ex: the opportunity cost of the owner’s time
Accounting Profit
= total revenue minus total explicit costs
Economic Profit
= total revenue minus total costs (including explicit & implicit Costs)
Production Function
A production function shows the relationship between the quantity of inputs used to produce a good and the quantity of output of that good
Marginal Product
The marginal product of any input is the increase in output arising from an additional unit of that input, holding all other inputs constant.
Diminishing marginal product
The marginal product of an input declines as the quantity of the input increases (other things equal)
Marginal Cost
Marginal Cost is the increase in Total Cost from producing one more unit: MC = delta TC/delta quantity
Fixed Costs
Fixed Costs do not vary with the quantity of output produced
Variable Costs
Vary with the quantity produced
Total Cost
FC + VC
Average total cost
ATC equals total cost divided by the quantity of output
- ATC = TC/Q
- ATC = AFC + AVC
Efficient scale
The quantity that minimizes ATC
Economies of scale
ATC falls as Q increases
