Econ Chap 7 Cost and Prod

1 Profit

Total Revenue − Total Cost. Example: You make $100 and spend $60 → profit = $40.

2 Explicit Costs

Costs where the business actually pays money. Examples: wages, rent, supplies.

3 Implicit Costs

Opportunity costs of resources the business already owns. Example: You run your own business instead of working a job that pays $50

4 Accounting Profit

Revenue − explicit costs only. It ignores implicit costs.

5 Economic Profit

Revenue − explicit costs − implicit costs. It considers the opportunity cost of everything.

6 Production Function

Shows the relationship between inputs and the output a business can produce. Example: workers + ovens → pizzas.

7 Inputs / Factors of Production

Resources used to produce something: natural resources, labor, capital, technology, and entrepreneurship.

8 Fixed Input

An input that cannot easily be changed in the short run. Example: the size of a restaurant or number of ovens.

9 Variable Input

An input that can be changed in the short run. Example: number of workers hired.

10 Short Run

A period where at least one input is fixed.

11 Long Run

A period where all inputs can be changed. A business can change its building, equipment, number of workers, etc.

12 Total Product (TP)

The total amount of output produced. Example: 3 workers make 12 pizzas → TP = 12 pizzas.

13 Marginal Product (MP)

The additional output produced by adding one more worker/input. Formula: MP = change in total product ÷ change in workers.

14 Law of Diminishing Marginal Product

When more of a variable input is added to a fixed input

15 Fixed Cost (FC)

A cost that doesn't change with output in the short run. Example: $500 monthly rent whether you make 0 or 100 pizzas.

16 Variable Cost (VC)

A cost that changes when output changes. Examples: wages and ingredients.

17 Total Cost (TC)

Fixed Cost + Variable Cost. Formula: TC = FC + VC.

18 Average Fixed Cost (AFC)

Fixed cost per unit of output. Formula: AFC = TFC ÷ Q. As production increases, AFC falls because the fixed cost is spread over more units.

19 Average Variable Cost (AVC)

Variable cost per unit of output. Formula: AVC = TVC ÷ Q.

20 Average Total Cost (ATC)

Total cost per unit of output. Formula: ATC = TC ÷ Q or AFC + AVC.

21 Marginal Cost (MC)

The additional cost of producing one more unit. Formula: MC = change in TC ÷ change in Q.

22 Why is ATC usually U-shaped?

At first, ATC falls because fixed costs are spread over more units. Eventually, diminishing marginal product causes costs to rise, so ATC increases.

23 Relationship between MC and ATC

If MC < ATC → ATC falls. If MC > ATC → ATC rises. If MC = ATC → ATC is at its minimum. Think of MC as your next test grade and ATC as your current average.

24 Economies of Scale

In the long run, as a business increases production, its average cost falls. Example: buying ingredients in bulk makes each pizza cheaper to produce.

25 Diseconomies of Scale / Constant Returns to Scale

Diseconomies: output increases but average cost rises, often because a company becomes too large and difficult to manage. Constant returns: output increases while average cost stays the same.