Costs of Production Flashcards
types of costs
explicit costs are opportunity cost of resources that take the form of a cash payment
implicit costs are the opportunity cost of a firm using its own resources without a corresponding cash payment
types of profit
accounting profit is total revenue minus all explicit costs
economic profit is total revenue minus all explicit and implicit costs
normal profit is the accounting profit necessary to ensure all resources earn their opportunity cost
total costs in the short run
total cost = total fixed cost + total variable cost
ATC, AVC and AFC in the short run
the MC curve first decreases and then increases
- decreasing marginal costs correspond to increasing marginal returns
- increasing marginal costs correspond to diminishing marginal returns
ATC and AVC curves are also U-shaped, which is again related to increasing and diminishing marginal returns
AFC is the vertical distance between the ATC and AVC curves
relationship between marginal cost and average costs
MC cuts both the AVC and ATC curves at their minimum points
relationship between marginal cost and marginal product
decreasing marginal costs corresponded with increasing marginal returns, and increasing marginal costs with diminishing marginal returns
long-run average cost
envelops the short-run average cost (SATC) curves of a company in the long run
indicates the lowest average cost of production at each rate of output when the firms size is allowed to vary
shows scale efficiencies in the long run
the minimum point on the LAC represents the minimum efficient scale
economies of scale
economies of scale are forces that cause a decrease in average costs as the scale of operation increases in the long run diseconomies of scale are forces that cause an increase in average costs as the scale of operation increase in the long run
the downward sloping section of the LAC is where economies of scale occur and the upward sloping section is where diseconomies of scale occur
