Chapter 14: Economics of Production: Costs, Revenue, and Scale Analysis

What is a production function?

A production function describes the relationship between inputs used in production and the output generated.

What is marginal product?

Marginal product is the increase in output that arises from an additional unit of input, holding other inputs constant.

How is total revenue calculated?

Total revenue (TR) is calculated as TR = Price (P) × Quantity (Q).

What is total cost?

Total cost (TC) is the market value of the inputs a firm uses in production.

How is profit calculated?

Profit is calculated as Profit = Total Revenue (TR) - Total Cost (TC).

What are explicit costs?

Explicit costs are input costs that require an outlay of money by the firm, such as wages and rent.

What are implicit costs?

Implicit costs are input costs that do not require an outlay of money, such as the opportunity cost of the owner's time.

What is the formula for total costs?

Total costs are calculated as Total Cost = Explicit Costs + Implicit Costs.

What is the difference between accounting profit and economic profit?

Accounting profit is total revenue minus total explicit costs, while economic profit is total revenue minus total costs (explicit and implicit).

What happens to accounting profit if explicit costs increase?

Accounting profit decreases if explicit costs increase, as it is calculated based on total revenue minus explicit costs.

What happens to economic profit if implicit costs increase?

Economic profit decreases if implicit costs increase, as it accounts for both explicit and implicit costs.

What is an example of explicit costs for Jelani's Gelato Shop?

Explicit costs include $20,000 for raw materials and $12,000 for rent, totaling $32,000.

What is an example of implicit costs for Jelani's Gelato Shop?

The implicit cost is the opportunity cost of the owner's time, which is $25,000.

How much profit does Jelani's Gelato Shop make?

Jelani's Gelato Shop makes a profit of $10,000 after calculating total revenue and total costs.

What is the marginal product of labor (MPL)?

MPL is calculated as the change in output (∆Q) divided by the change in labor (∆L).

What are economies of scale?

Economies of scale refer to the cost advantages that a firm experiences as it increases its level of output.

What are diseconomies of scale?

Diseconomies of scale occur when a firm's per-unit costs increase as it produces more output.

What are constant returns to scale?

Constant returns to scale occur when a firm's output increases in direct proportion to an increase in inputs.

What is the opportunity cost of capital?

The opportunity cost of capital is the potential return that is foregone by investing capital in a business instead of saving or investing it elsewhere.

What is the total cost for Jelani's Gelato Shop?

The total cost for Jelani's Gelato Shop is $57,000, combining explicit and implicit costs.

What does the Law of Diminishing Marginal Product state?

The marginal product of an input eventually declines as the quantity of the input increases.

How does the production function change as more labor is used?

The slope of the production function decreases, indicating diminishing marginal product.

What is the relationship between marginal product of labor (MPL) and hiring an extra worker?

Hiring one extra worker increases output by the marginal product of labor (MPL) and increases costs by the wage paid.

What are fixed costs (FC)?

Costs that do not vary with the quantity of output produced and are incurred even if production is zero.

What are variable costs (VC)?

Costs that vary with the quantity of output produced.

What is the formula for total cost (TC)?

Total cost (TC) is the sum of fixed costs (FC) and variable costs (VC): TC = FC + VC.

What is average total cost (ATC)?

Average total cost (ATC) is calculated as total cost (TC) divided by the quantity of output (Q): ATC = TC / Q.

How is marginal cost (MC) defined?

Marginal cost (MC) is the increase in total cost that arises from producing an extra unit of output: MC = ΔTC / ΔQ.

What happens to ATC when MC is less than ATC?

When MC < ATC, the average total cost (ATC) is falling.

What happens to ATC when MC is greater than ATC?

When MC > ATC, the average total cost (ATC) is rising.

What is the efficient scale of production?

The efficient scale of production is the quantity of output at which average total cost (ATC) is minimized.

What is the difference between short run (SR) and long run (LR) in terms of costs?

In the short run, some inputs are fixed, while in the long run, all inputs are variable.

What does the total cost curve represent?

The total cost curve represents the total cost of producing a given amount of output.

What is the relationship between the production function and the cost function?

The production function is related to the cost function through diminishing marginal product and increasing marginal cost.

What is the marginal cost curve's relationship to the total cost curve?

The marginal cost (MC) curve is the slope of the total cost (TC) curve.

How do fixed costs affect average total cost at low output levels?

Average total cost (ATC) is high at low output levels due to fixed costs (FC).

What is the implication of a firm experiencing constant returns to scale?

In constant returns to scale, long-run average total cost remains the same as the quantity of output changes.

What is the significance of the minimum point on the ATC curve?

The minimum point on the ATC curve is where the marginal cost (MC) curve intersects the ATC curve.

What does it mean for a firm to maximize profit?

Maximizing profit means achieving the highest possible difference between total revenue and total cost.

What is economic profit?

Economic profit takes into account both explicit and implicit costs, while accounting profit considers only explicit costs.

What happens to average total cost as output increases initially?

Average total cost (ATC) initially falls as output increases due to low marginal costs.