chapter 6 econ

explicit costs

input costs that require a direct outlay of money by the firm

implicit costs

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

economic profit

the business's total revenue minus the opportunity cost of its resources, It is usually less than the accounting profit. Used when deciding to keep business open or do something else

accounting profit

total revenue minus explicit cost and depreciation

normal profit

zero economic profit. Minimum level of economic profit a company needs to stay in business. In highly competitive markets, is a result of no barriers to entry, competition reduces sales until extra profit you are making leaves, no incentive to enter market after reach this point.

variable input

cost that changes with the amount of good produced (ingredients, wages)

fixed input

am input whose quantity is fixed for a period of time and cannot be varied

long run

time period in which all inputs can be varied

short run

time period in which at least one input is fixed

production function

relationship between the quantity of inputs a firm uses and the quantity of output it produces

average cost

total cost/ quantity. Declines as q increases because fixed cost is spread over a large \# of units

economies of scale

companies that produce more can utilize mass production techniques and spread out their fixed costs over many units

profit maximizing rule

continue to produce until marginal revenue = marginal cost

marginal revenue

additional revenue earned from selling another unit

marginal cost

additional cost of producing another unit. Decreases due to specialization and increased efficiency.

law of diminishing marginal returns

as you add variable resources, like workers, to a set number of fixed resources, the additional output generated from each additional worker will eventually decrease. Once we hit this point, MC will increase at a large rate

sunk costs

already been paid and cannot be recovered. should not be factored into decision making because there is no way to get it back

efficient scale

quantity of output that minimizes the average total cost in the long run

long run average total cost curve

series of short run atc curves

constant returns to scale

double our wage and labor costs and out output exactly doubles. Olive Garden has more overhead costs, but also is larger than local competitors

diseconomies of scale

double our labor and wage costs and output increases by less than double. A larger firm can become less effective at holding down long-run average total costs because it may require expanded layers of management and coordination

short run profits

P \> ATC

short run losses

P< ATC

produce with losses

TR \> VC

P \> AVC

P < ATC

short run shut down

TR < VC

P < AVC

Producing would cost more than fixed costs. Expected to change in long run

long run exit market

no more AVC

TR < TC

P < ATC

marginal product

slope of total product

tp is maximized when mp =0

change in total output/ change in input

total cost curve

sum of fized cost and variable cost of producing that quantity of output. Becomes steeper as more ouput is produced due to diminishing marginal returns. Costs more to produce the same amount

short run average total cost

total cost/ quantity of output. decrease bc of spreading, increase bc of dmr

spreading effect

large ouput, greater the quantity of output over which fixed cost is spread, leading to lower the average fixed cost

diminishing returns effect

larger the output, the greater the amount of variable input required to produce additional units leading to higher average variable costs

increasing output

raising profit when MR \> MC

decreasing output

raising profit when MR < MC

total profit

TR - TC

(P - ATC) x Q (ignore q)

explicit costs

input costs that require a direct outlay of money by the firm
implicit costs