Module 5 Flashcards
Explicit costs
Out-Of-Pocket costs like wages, rent, or materials.
Example: $500 paid for raw materials
Implicit Costs
Definition: Opportunity costs of using resources the firm owns.
Example: Foregone salary from leaving a job to start a business
Accounting Profit
Formula: Total Revenue - Explicit Costs
Example: Revenue = $1,000; Explicit Costs = $600; Profit = $400.
Economic Profit
Formula: Total Revenue - (Explicit Costs + Implicit Costs)
Example: Revenue = $1,000; Explicit Costs = $600; Implicit Costs = $200; Profit = $200.
Marginal Product (MP)
Formula:
MP=ΔTotalProduct/ΔLabor
Key Point: Initially increases, then decreases due to the Law of Diminishing Marginal Returns
Average Product (AP)
Formula: AP=TotalProduct/Labor
Usage: Measures productivity of workers.
Total Costs (TC)
Formula: TC=FixedCosts(FC)+VariableCosts(VC)
Example: FC = $500; VC = $300; TC = $800.
Marginal Cost (MC)
Formula: MC=ΔTC/ΔQ
Key Point: Initially decreases, then increases due to diminishing returns
Perfect Competition Assumptions
Many buyers and sellers.
Homogeneous products.
Free entry and exit.
Perfect information.
Firms are price takers
Price Taker
A firm that accepts market prices and cannot influence them.
Profit Maximization in Perfect Competition
Rule: Produce where MR=MC.
Key Point: Ensures highest possible profit or smallest loss.
Shutdown Point
Definition: When price < Average Variable Cost (AVC).
Key Point: Firm minimizes loss by ceasing production.
Efficiency in Perfect Competition
Productive Efficiency: Producing at the lowest cost (minimum ATC).
Allocative Efficiency: Price = Marginal Cost (P = MC).
Productive Efficiency
Producing at the lowest cost (minimum ATC).
Allocative Efficiency
Marginal Cost (P = MC).
Total Revenue (TR)
Formula: TR=Price × QuantitySold
Example: Selling 10 items at $5 each results in TR = $50
Short-Run vs. Long-Run Production
Short Run: At least one input (like capital) is fixed.
Long Run: All inputs are variable
Fixed vs. Variable Inputs
Fixed Inputs: Cannot change quickly (e.g., machinery).
Variable Inputs: Adjust easily (e.g., labor, materials)
Cost Calculations: Average Total Cost
ATC = TC/Q
Shutdown Point
Definition: Occurs when Price<AVC(AverageVariableCost).
Key Point: Minimizes loss by halting production
Profit maximization
MR = MC
Key Point: Ensures maximum profit or smallest loss
