6. Micro -- Productivity and Costs -- Dunbar

Total Revenue (TR)

Total Revenue for a business/firm equals the total units sold times the price per unit. That is, TR = PxQ.

Production Function

This "function" shows how a business/firm is able to turn inputs into output.

Short Run

A period of time when at least one input is fixed.

Long Run

A period of time when all inputs are variable -- no inputs are fixed.

Total Product (TP or Q)

The total output produced for a given amount of inputs.

Marginal Product (MP) of a Variable Input

The additional (marginal) output when one more unit of a variable input in added to fixed inputs.

Average Product (AP) of a Variable Input

The output per-unit of input, measure as (Total Product)÷(Total Units of the Input).

Law of (Eventually) Diminishing Marginal Productivity

This economic "law" states that as we add more and more units of a variable input (e.g. labor) to fixed inputs, (eventually) the additional output (marginal product) begins to decrease. This holds because of having "too many" of the variable inputs for the available fixed inputs. This law is also called the "Law of Diminishing Returns."

Explicit Costs

The costs of running a business where money is directly paid out. These are the costs recorded on the books of a business. They are also called "Accounting Costs."

Implicit Costs

The costs of running a business which do not include monetary outlays. For example, the value of the owner's time/talents in his/her next-best use OR the return your capital investment could have earned in it's next best use. Also called "Time Opportunity Costs."

Economic Costs

Economic Costs = Explicit Costs + Implicit Costs.

Accounting Profit

Accounting Profit = Total Revenue (TR) - Explicit Costs.

Economic Profit

Economic Profit = Total Revenue (TR) - Economic Costs = Total Revenue (TR) - Explicit Costs - Implicit Costs.

Fixed Costs

Costs that do NOT depend on how much is produced. These costs must be paid regardless of the level of production.

Variable Costs

Costs that vary with the how much is produced. Thus, these costs increase as more of the good/service is produced and decrease if less of the good/service is produced.

Average Fixed Cost (AFC)

Fixed Cost per unit of output. Calculated as Total Fixed Cost divided by the Units of Output (i.e. TFC/Q).

Average Variable Cost (AVC)

Variable Cost per unit of output. Calculated as Total Variable Cost divided by the Units of Output (i.e. TVC/Q).

Average Total Cost (ATC)

Total Cost per unit of output. Calculated as Total Cost divided by the Units of Output (i.e. TC/Q). Can also be calculated as ATC=AFC+AVC.

Marginal Cost (MC)

The additional cost associated with producing one more unit of output. Calculated as the Change in Total Cost divided by the Change in Units of Output.

Marginal Revenue (MR)

The additional revenue for producing and selling one more unit of output. Calculated as the Change in Total Revenue divided by the Change in Units of Output.

Profit-Maximization Rule

Rule that states than in order to maximize profits, all firms should produce to the level where MR=MC. Proof -- If MR>MC for a unit, the revenues are growing faster than costs, and increasing production will increase the firm's profits. Conversely, if MR

"Economies of Scale"

These occur when the long-run average cost of producing goods/services declines as a firm gets larger (i.e. increases its "scale").

"Diseconomies of Scale"

These occur when the long-run average cost of producing goods/services increases as a firm gets larger (i.e. increases its "scale").

"Constant Returns to Scale"

These occur when the long-run average cost of producing goods/services remains constant/unchanged as a firm gets larger (i.e. increases its "scale").

"Minimum Efficient Scale (MES)"

The output level where the long-run average (LRAC) is at its lowest level.