Q2 L2: cost of production (INCLUDED IN FINALS) Flashcards
Formula for profit?
Profit = Total revenue – Total cost
the amount a firm receives from the sale of its output
Total revenue
the market value of the inputs a firm uses in production
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
total revenue minus total explicit costs
Accounting profit
total revenue minus total costs (including explicit and implicit costs)
Economic profit
ignores implicit costs, so it’s higher than economic profit.
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
The ____________________ of any input is the additional output after hiring one more worker, holding all other inputs constant.
marginal product
formula for the Marginal product of labor (MPL)?
Marginal product of labor (MPL) = ∆ Q ÷ ∆ L
∆ Q = change in output
∆ L = change in labor
note: ∆ (delta) = “change in…”
Why is MPL Important
PRINCIPLE 3: Rational people think at the margin.
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 (MC)
formula for the Marginal Cost (MC)?
Marginal Cost (MC) = ∆ TC ÷ ∆ Q
∆ TC = change in total cost
∆ Q = change in output
note: ∆ (delta) = “change in…”
do not vary with the quantity of output produced.
Fixed costs (FC)
vary with the quantity produced.
Variable costs (VC)
formula for the Total cost (TC)?
Total cost (TC) = FC + VC
Fixed costs (FC)
Variable costs (VC)
equals total cost divided by the quantity of output
Average total cost (ATC)
formula for the Average total cost (ATC) ?
Average total cost (ATC) =
(1.) ATC = TC ÷ Q
(2.) ATC = AFC + AVC
Total cost (TC)
Output (Q)
Fixed costs (FC)
Variable costs (VC)
Costs are critically important to many business decisions including?
- production,
- pricing, and
- hiring.
/not a question/
/SUMMARY/
- Implicit costs do not involve a cash outlay, yet are just as important as explicit costs to firms’ decisions.
- Accounting profit is revenue minus explicit costs. Economic profit is revenue minus total (explicit + implicit) costs.
- The production function shows the relationship between output and inputs.
- The marginal product of labor 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 usually diminishes as the input increases. Thus, as output rises, the production function becomes flatter and the total cost curve becomes steeper.
- Variable costs vary with output; fixed costs do not.
/DEFINITIONS AND FORMULAS/
Explicit costs
- Costs that require an outlay of money by the firm
Implicit costs
- Costs that do not require an outlay of money by the firm
Fixed costs (FC)
- Costs that do not vary with the quantity of output produced
Variable costs (VC)
- Costs that vary with the quantity of output produced
Total cost
- The market value of all the inputs that a firm uses in production
- Formula: TC = FC + VC
Average fixed cost
- Fixed cost divided by the quantity of output
- AFC = FC / Q
Average variable cost
- Variable cost divided by the quantity of output
- AVC = VC / Q
Average total cost
- Total cost divided by the quantity of output
- ATC = TC / Q
Marginal cost
- The increase in total cost that arises from an extra unit of production
- MC = ∆ TC / ∆ Q