Section 6 Flashcards
Profit Formula
Total revenue minus total cost
Total Revenue Formula
Price times quantity
Total Product
TP
Output produced by all employees
Marginal Product
MP
Change in total product divided by change in labor input
Additional output that is generated by an additional worker
Marginal Product Changes
When marginal product increases then total product increases at an increasing rate.
When marginal product decreases but remains positive then total product will increase, but at a decreasing rate.
When marginal product is negative then total product will decline.
If marginal product is greater then average product then average product will rise.
Law of diminishing returns
As successive input is added to a FIXED AMOUNT OF RESOURCES the increase of each additional variable resource will eventually decline
Assumes that units of labor are of equal quantity
Average product
AP
Total product divided by units of labor
Is at it highest point when it is equal to marginal product.
Explicit Costs
Out of pocket expenses
Implicit Costs
Opportunity costs
Accounting Profits
Subtract explicit costs from total revenue
Overstates the economic success of your company
Economic Profits
Subtract explicit and implicit costs from total revenue
Normal Profit
Minimum return to maintain a resource in it’s current use.
This is the same as earning a zero economic profit.
Short-run Definition
Has at least one of its inputs or resources is fixed.
Time period to short to alter its plant capacity
Long-run Definition
All resources are variable, there are no fixed costs.
Time period long enough to alter all resources, including plant capacity
Fixed Costs
Costs that do not change as the level of production changes
Variable Costs
Costs that change as output changes
Total Fixed Cost
TFC
A flat cost that stays the same regardless of the amount of production.
Total Variable Cost
TVC
The sum of all costs that increase as production increases.
Total Cost
TC
Sum of total fixed costs and total variable costs.
TFC + TVC
Marginal Cost
MC
Change in TC / change in output
OR
change in TVC / change in output
Average Fixed Costs
AFC
Fixed costs divided by total output
TFC / output
Get smaller as more quantity is produced
Average Variable Costs
AVC
total variable cost divided by output
TVC / output
Declines initially then raises again as diminishing returns require more resources
Average Total Costs
ATC
Total cost divided by output
TC / output
OR
TFC + TVC / output
MC & MP Relationship
MC is a mirror reflection of MP, and the AVC is a mirror reflection of AP
When marginal product is falling, marginal cost is rising
MC, AVC, and ATC relationship
When MC exceeds ATC, ATC will rise
MC will intersect the ATC curve at the minimum point
MC will cross the AVC curve at the minimum point
Long-run ATC
Called the planning curve
Made up of tangency of the short-run ATC curves
Curve is smooth and touches the minimum ATC of each corresponding level of output
Economies of Scale
Decreasing long-run ATC cost curve.
As plant size increases you have lower average costs of production
Causes of Economies of Scale
Labor Specialization
Managerial Specialization
Efficient Capital
Other factors: like startup costs, advertising costs
Diseconomies of Scale
Increase in long-run ATC cost curve
As plant size increases you have higher average costs of production
Causes of Diseconomies of Scale
Problems with communication and cooperation
Bureaucratic red tape
More management and worker supervision
Constant Returns to Scale
Long-run ATC does not change
Point between where economies of scale end and diseconomies of scale start
Minimum Efficient Scale
MES - The lowest level of output at which a firm can minimize long-run average costs
Different Industries and their Scale
Long MES: large and small firms can coexist - apparel, food, furniture, banking
Long ES and short DES: Automobile, steel, heavy industry, information technology, software/hardware
Short ES and long DES: Farming, bakeries, clothing
Natural Monopoly
When ATC is minimized when only one firm produces the particular good.
Extreme version of when Industries that have a long ES and short DES favor large-scale producers, small companies can’t reach the same scale.
Economies of Scope
When per unit costs are lowered as the range or products produced increases - this is creating different but complimentary products and the shared production allows you to lower your cost per unit
Sunk Costs
Costs that are no longer recoverable after they have occurred
When making a decision you should ignore all sunk costs
