Unit 3

microeconomics

Production Function

The relationship between the quantity of inputs used to make a good and the quantity of output of that good

Total Revenue

The amount a firm receives for the sale of its output

Total Cost

The market value of the inputs a firm uses in production

Profit

Total Revenue - Total Cost

Explicit Costs

Input costs that require an outlay of money by the firm

Implicit Costs

Input costs that do not require an outlay of money by the firm

Accounting Profit

Total revenue minus total explicit costs

Economic Profit

Total revenue minus total cost, including both explicit and implicit costs

Fixed Costs

Costs that do not vary with the quantity of output produced

Variable Costs

Costs that vary with the quantity of output produced

Accounting Profit

total revenue - total explicit costs

Economic Profit

total revenue - total costs (including both explicit costs & implicit costs)

Marginal Revenue (MR) = Marginal Cost (MC)

Firms maximize profits by producing where…

P > AVC

In the Short Run:

Firms should produce when…

P < AVC

In the Short Run:

Firms should shut down if…

P > ATC (firms are making profits)

In the Long Run:

Firms should enter the market if…

P < ATC (firms are making losses)

In the Long Run:

Firms should exit the market if…