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
