Ch.13 AP Microeconomics (The Costs of Production)

Profit

Total Revenue - Total Cost or in symbolic terms P = TR - TC.

Explicit costs

Input costs that require an outlay of money by the firm (e.g. rent). Money that actually leaves a firm in the productive process. Distinguish from implicit costs.

Total revenue

The total amount of money a firm receives by selling goods or services symbolized by TR.

Total Cost

The market value of ALL the inputs a firm uses in production, symbolized by TC, is calculated by adding fixed costs and variable costs. Also depends on accounting perspective and economic perspective.

Implicit costs

Input costs that do not require an outlay of money by the firm (e.g. interest forgone on money used). The opportunity costs associated with a firm's use of resources that it owns.

Interest

A large amount of money losses implicitly can be the cost of capital (investment), by buying the capital you forgo _______ you could have gained.

Accounting profit

Total revenue minus total explicit cost, Profit will equal more than 0 in this calculation.

Economic profit

Total revenue minus total cost, including both explicit and implicit costs, in this view profits are usually not as large as accounting profit.

Production function

The relationship BETWEEN quantity of inputs (usually worker) used to make a good and the quantity of output(product or services) of that good. Gets flatter as input inceases.

Marginal Product

The increase in output that arises from an additional unit of input( usually a worker acts as the unit of input).

Diminishing Marginal Product

The property whereby the marginal product of an input declines as the quantity of the input increases. Makes the production function level off after a while. Makes sense because the firm may become more crowded which reduces overall efficiency.

Total cost curve

A graph that shows the relationship between total variable cost and the level of a firm's output. Gets steeper as the amount produced increases.

Fixed costs

Expenses that remain the same for a period of time; must be paid regardless of the quantity of a good or service produced/sold. Like rent., salary ,etc,.

Variable costs

Costs that change directly with the amount of production (e.g. energy supply and labor costs).

Industrial Organization

The study of how firms' decisions about prices and quantities depend on the market conditions they face. An example of questions that this can answer is : "How does the number of firms in a industry affect the prices in a market and the efficiency of the outcome.

average total cost

Total cost divided by the quantity of output produced. Decreases in a somewhat parabolic rate.

average fixed cost

Fixed cost divided by the quantity of output. Decreases at a somewhat parabolic shape.

average variable cost

Variable cost divided by the quantity of output. Always rises at a constant rate.

marginal cost

the increase in total cost that arises from an extra unit of production, Always rises at a pretty constant rate.

Efficient scale

The quantity of output that minimizes average total cost, is at the bottom of the ATC curve which happens to be an intersection with the MC curve.

falling

Whenever marginal cost is less than average total cost, average total cost is ________

rising

Whenever marginal cost is more than average total cost, average total cost is ________

economies of scale

The property whereby long-run average total cost falls as the quantity of output increases (left-most downward sloping part of the long-run ATC). Arises because higher production levels allow specialization among workers, allowing each of them to get better at a specific task.

diseconomies of scale

The property whereby long-run average total cost rises as the quantity of output increases (right-most upward sloping part of the long-run ATC). Usually arise because of coordination problems.

constant returns to scale

The property whereby long run average total cost stays the same as the quantity of output changes