chapter 6 Flashcards
explicit costs
paid in actual money, used in accounting profit
which is acct profit= tr -explicit costs
implicit costs
cost of using owners resources, not required an expenditure of money
sunk costs
historical costs that are non recoverable
accounting profit
tr -explicit costs
economic profit
tr -explicit costs-implicit costs
normal profit
minimum profit earned to keep business running, economic profit =0
TP
total product- total output at any quantity **MAX TP when MP=0 max output is the max amount that the firm can produce
MP(L)
marginal product -measure of change in tp as a result of adding additional units of labour
MAX MP is the most productive unit
increased MP from division of labour and specialization, then after reaching max mp, mp starts to decrease due to the law of diminishing returns or since CAPITAL IS FIXED
formula: change in tp/ change in labour
min MC at max MP
AP(L)
average product, TP/L total product divided by the quantity of labour.
** ALSO known as the PRODUCTIVITY of each worker
MAX AP when there is the most productive output
min AVC at max AP
division of labour
divide production process into specialized tasks this allows 5 things. 1. best person for the tax. 2.increase skill of each worker. 3. time saved changing tools. 4. time saved changing tasks. 5. machine specialization
law of diminishing returns
more variable input added to a fixed input at first will increase then at some point start to decrease (too many workers jammed into one tiny subway)
*when law of diminishing returns starts total product can still be increasing but the rate of increase (ALSO KNOWN AS MP) is decreasing
Max AP
max productivity of output– for all workers, this is when AVC is at minimum
max MP
most productive unit after this point law of diminishing returns starts
this is when mc is at minimum
mp calculation
delta tp/delta q
ap calculation
tp/q
how are margins and averages related
margins move averages, when margins start to increase, averages follow. when margins start to decrease averages follow.
when is AP maxed
when AP= MP
TVC
total variable cost
=sum of all MC
=TC-TFC
=AVCxQ
MC
marginal cost, change in TVC as a result of producing one more unit.
MC=delta TVC/delta Q
=delta TC/delta Q
when MC is at minimum MP is at max
for costs what is q
q is not L q is the amount of production
AVC
average variable cost – TVC/Q when AVC is at minimum AP is at max
increase in MP
a decrease in MC will occur
decrease in MP
an increase in MC will occur
increase in ap
then avc decreases
