Chapter 14: The Costs of Production

How is Profit calculated?

TR - TC.

What are Explicit Costs?

Input costs that require an outlay of money by the firm.

What are Implicit Costs?

Input costs that do not require an outlay of money

(e.g., the opportunity cost of the owner's time or financial capital).

Formula for TC?

$TC = \text{Explicit Costs} + \text{Implicit Costs}$.

How does Economic Profit differ from Accounting Profit?

Economic Profit: TR - (Explicit + Implicit costs).

Accounting Profit: TR - (Explicit costs).

Which is usually larger: Accounting or Economic Profit?

Accounting profit is usually larger because it ignores implicit costs.

What is the 'Marginal Product'?

The increase in output that arises from an additional unit of input.

Define 'Diminishing Marginal Product.'

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

How does Diminishing Marginal Product affect the curves?

1. Production Function: Gets flatter.

2. Total-Cost Curve: Gets steeper.

Formula for ATC?

$ATC = \frac{TC}{Q}$ or $ATC = AFC + AVC$.

Formula for MC?

$MC = \frac{\Delta TC}{\Delta Q}$ (The cost of one additional unit).

Why is the ATC curve U-shaped?

It reflects the tug-of-war between falling AFC and rising AVC.

What is the 'Efficient Scale'?

The quantity of output that minimizes ATC.

Where does MC cross ATC?

The MC curve always crosses the ATC curve at its minimum point.

What happens to ATC when MC < ATC?

Average total cost is falling.

How do costs change in the Long Run?

All costs become variable; firms have much greater flexibility.

Define 'Economies of Scale.'

When long-run ATC falls as the quantity of output increases.

(often due to worker specialization)

Define 'Diseconomies of Scale.'

When long-run ATC rises as quantity increases.

(often due to coordination problems)