Chapter 8 Flashcards
What is profit?
When the total revenue is greater than the total costs
What is a loss?
When the total revenue is less than the total costs
What is total revenue?
It is the amount a firm receives from the sale of goods and/or services
What is total costs?
It is the amount a firm spends to produce and/or sell goods and/or services
= explicit costs + implicit costs
What are explicit costs?
They are tangible out-of-pocket expenses incurred
What are implicit costs?
They are the costs of resources already owned, for which no out-of-pocket payment is made
What is accounting profit?
= total revenues - explicit costs
What is economic costs?
= total revenues - (explicit costs + implicit costs)
OR
= accounting profit - implicit costs
What is Output?
It is the product that the firm creates
What are factors of production?
They are the inputs (labour, land and capital) used in producing goods and/or services
The production function
It describes the relationship between the inputs a firm uses and the output it creates
What is marginal product?
It is the change in output associated with one additional unit of an input
What does diminishing marginal product occur?
- When successive increases in inputs are associated with a slower rise in output (yellow zone in graph (b))
- Firms should continue production as long as the revenue from output is more than the costs of input
Why does diminishing marginal product occur?
The firm is fixed in the short run and inputs are fully utilised
