ECON (COSTS OF PRODUCTION) Flashcards
Formula to get the Profit
Profit = Total revenue – Total cost
require an outlay of money,
e.g., paying wages to workers.
Explicit Costs
do not require a cash outlay,
e.g., the opportunity cost of the owner’s time.
Implicit Costs
Costs: Explicit and Implicit - remember one of the ten principles, what is it?
The cost of something is
what you give up to get it.
Accounting profit formula
total revenue minus total explicit costs
Economic profit
total revenue minus total costs (including
explicit and implicit costs)
what profit is higher? Accounting or Economic
Accounting Profit
shows the relationship
between the quantity of inputs used to produce a
good and the quantity of output of that good.
production function
production function can be represented by a _____, _____, or ____.
table, equation, or
graph.
of any input is the
additional output after hiring one more worker,
holding all other inputs constant.
Marginal product
Marginal Product of labor formulaa
(MPL) = ∆Q/∆L
Why MPL is important?
Rational people think at the margin.
Why MPL Diminishes?
In general, MPL diminishes as L rises
whether the fixed input is land or capital
(equipment, machines, etc.).
The marginal product of an input declines as the
quantity of the input increases (other things equal).
Diminishing marginal product
is the increase in Total Cost from
producing one more unit:
Marginal Cost
Marginal Cost formula
MC= ∆TC/ ∆Q
Why MC is important?
Farmer Jack is rational and wants to maximize
his profit. To increase profit, should he produce
more or less wheat?
To find the answer, Farmer Jack needs to
“think at the margin.”
do not vary with the quantity of
output produced.
fixed costs
vary with the quantity
produced.
Variable costs
Average Fixed Cost Formula
FC/Q
Average Variable Cost Formula
VC/Q
Average Total Cost
TC/ Q or AFC + AVC
are critically important to many business
decisions including production, pricing, and
hiring.
Costs
do not involve a cash outlay,
yet are just as important as explicit costs
to firms’ decisions.
Implicit Costs
is revenue minus explicit costs.
Accounting Profit
is revenue minus total (explicit +
implicit) costs.
Economic profit
shows the relationship
between output and inputs.
production function
is the increase in
output from a one-unit increase in labor, holding
other inputs constant. The marginal products of
other inputs are defined similarly.
Marginal product of labor
usually diminishes as the input
increases.
Marginal Product
as output rises, the production
function becomes _____ and the total cost curve
becomes_____.
flatter , steeper
vary with output;
Variable Costs
do not very with output
Fixed Costs
