Cost of Production Flashcards
firm’s goal
maximize profits
formula to find profit
total revenue - total cost
total revenue
amount a firm recieves from the sales of its output (what people pay for goods)
total cost
the market value of the inputs a firm uses for production
solving total revenue
quantity of output x price it sells
Explicit costs
requires an outlay of money (paying wages, buying ingredients)
Implicit costs
do not require a cost outlay
Production Function
relationship between the quantity of inputs used to produce a good and the quantity of output of that good
Marginal product
increase in total output arising from an additional unit of that input
what is the notation of marginal product?
delta (change in)
Finding marginal product of labor (MPL)
change in quantity divided by change in labor
as labor increases, what happens to MPL?
the MPL decreases (the curve will get flatter)
Diminishing marginal product
the marginal product of an input declines as the quantity of input increases
finding average total cost
total cost divided by the quantity of output
average fixed cost
fixed cost divided by the quantity of output
average variable cost
variable cost divided by the quantity of output
marginal cost
increase in total cost that arises from an extra unit of production
relationship with rising marginal cost
marginal cost rises as the quantity of output produced decreases
solving for total cost
Fixed cost plus variable cost
average total cost (ATC)
total cost divided by the quantity of output
When Marginal Cost is greater than ATC
the ATC is falling
when the ATC is greater than Marginal Costs
the ATC is rising
Efficient scale
the quantity that minimizes the ATC (the lowest ATC point)
Economies of scale
ATC falls as output increases
Constant return to scale
ATC stays the same as output increases
If a production function shows declining marginal product of an input as the quantity of input increases, then the production function exhibits
decreasing marginal product
When adding another unit of labor leads to an increase in output that is smaller than the increase in output that resulted from adding previous units of labor, the firm is experiencing
diminishing marginal product
