Unit 3 Flashcards
the principle of marginal
analysis
every activity should continue until
marginal benefit equals marginal cost.
Marginal revenue
is the change in total
revenue generated by an additional unit
of output.
optimal output rule
The optimal output rule says that profit
is maximized by producing the quantity
of output at which the marginal revenue
of the last unit produced is equal to its
marginal cost.
The marginal cost curve
shows how the cost of producing one more unit depends on the quantity that has already been produced.
The marginal revenue curve
shows how marginal revenue varies as output varies
An explicit cost
is a cost that involves actually laying out money.
An implicit cost
does not require an outlay of money; it is
measured by the value, in dollar terms, of
benefits that are forgone.
The accounting profit of a business
is the business’s total revenue minus the
explicit cost and depreciation.
The economic profit of a business
is the business’s total revenue minus the
opportunity cost of its resources. It is usually
less than the accounting profit.
The implicit cost of capital
is the opportunity cost of the capital used by a
business—the income the owner could have
realized from that capital if it had been used
in its next best alternative way.
An economic profit equal to zero is also known as…
a normal profit. It is an economic profit just high enough to keep a firm engaged in its current activity.
The long-run average total cost
curve
shows the relationship between
output and average total cost when
fixed cost has been chosen to minimize
average total cost for each level of output.
There are economies of scale when…
long-run average total cost declines as output
increases.
There are increasing returns to scale
when…
output increases more than in
proportion to an increase in all inputs. For
example, with increasing returns to scale,
doubling all inputs would cause output to
more than double.
There are diseconomies of scale when
long-run…
average total cost increases as
output increases.
There are decreasing returns to
scale when…
output increases less
than in proportion to an increase in
all inputs.
There are constant returns to
scale when…
output increases directly in
proportion to an increase in all inputs.
A sunk cost
is a cost that has already
been incurred and is nonrecoverable.
A sunk cost should be ignored in a
decision about future actions.
A fixed cost
is a cost that does not depend
on the quantity of output produced. It is the
cost of the fixed input.
A variable cost
is a cost that depends on
the quantity of output produced. It is the cost
of the variable input.
The total cost curve
shows how total cost depends on the quantity of output.
The total cost
of producing a given quantity
of output is the sum of the fixed cost and
the variable cost of producing that quantity
of output.
Average total cost
often referred to as simply
as average cost, is total cost divided by
quantity of output produced.
A U-shaped average total cost
curve
falls at low levels of output and
then rises at higher levels.
