SR Production + Costs Flashcards
What is the Profit Function?
Profit = TR - TC
How do you calculate Total Revenue?
TR = PQ
What are Total Costs?
Total Opportunity Cost
What 2 types of costs are included in Opportunity Cost?
Implicit and Explicit Costs
Explicit Costs
Input costs that require expenditure by a firm
Implicit Costs
Input Costs that do NOT require expenditure by a firm
When are resources in their best use?
When they cover the Cost of their Next Best Use
Concave Prod. Func. means the TC Curve is what shape?
Convex
Convex Prod. Func. means the TC Curve is what shape?
Concave
A Linear Production Function means the TC Curve is what shape?
Linear
Fixed Costs
Costs that do NOT vary with Output
SR Concept
Variable Costs
Costs that do Vary with Output
How are Total Costs Calculated?
TC = FC + VC
The Full Cost of Production
How is AFC Calculated?
Average Fixed Costs
AFC = FC / Q
How is AVC Calculated?
Average Variable Costs
AVC = VC / Q
How is ATC Calculated?
Average Total Costs
ATC = TC / Q = (FC + VC) / Q = AFC + AVC
How is MC Calculated?
Marginal Costs
MC = dTC / dQ
Draw AFC curve
Constantly Decreasing Costs as Output Increases
Draw AVC curve
Slight U-Shaped Curve
Draw ATC curve
U-Shaped Curve
Converges with AVC
Draw MC curve
Initially Decreasing then Increases Exponentially
Where does MC cross ATC and AVC?
At the Bottom point of ATC and AVC
When is AC falling?
MC < AC
Additional Cost is lower than Average –> Average Cost falls
When is AC rising?
MC > AC
Additional Cost is higher than Average –> Average Cost rises
What happens to the Average if MC = AC
Average does NOT Change
How do we find out how ATC changes with Q?
dATC / dQ
How do you calculate dATC / dQ?
QUOTIENT RULE
ATC = TC/Q
dATC /dQ = [Q(dTC/dQ) - TC] / Q^2 = (MC - ATC) / Q
Since, MC = dTC / dQ
For dATC / dQ, when Q > 0, when is ATC falling, rising and constant?
ATC Rising when–> MC > ATC
ATC Falling when–> MC < ATC
ATC Constant when–> MC = ATC
When Labour is the only Variable Input, what is the Link between Production + Costs?
dVC = wdL, w = wage rate
Remember: MC = dTC/dQ = (dVC/dQ) + (dFC/dQ) = dVC/dQ
MPL = dQ / dL
==> MC = wdL / dQ
=====> MC = wdL / dQ = w / MPL
Therefore, when: MPL Increases –> MC Decreases
MPL Decreases –> MC Increases
