(HL) Rational Producer Behaviour: Cost, Revenue, Profit

Economic Cost

The opportunity cost of producing a good, which includes calculating the costs of the factors of production used.

Sunk Cost

An unrecoverable cost.

Costs

The total expenditure a firm incurs when utilizing economic resources to produce goods and services.

Explicit Cost

Costs involving direct payment of money for inputs to produce a good, e.g. raw materials, electricity, rent.

Implicit Cost

The opportunity cost of a firm’s factors of production, such as potential earnings from alternative uses of those factors.

Short Run

A period in which at least one factor of production is fixed.

Long Run

A period in which all factors of production are interchangeable.

Total Fixed Cost (TFC)

Costs that remain constant and are not affected by the number of outputs produced.

Total Variable Cost (TVC)

Costs that vary depending on the level of output produced.

Total Cost (TC)

The sum of total fixed costs and total variable costs.

Average Fixed Cost (AFC)

The fixed cost per unit of output.

Average Variable Cost (AVC)

The variable cost per unit of output.

Average Total Cost (ATC)

The total cost per unit of output.

Marginal Cost (MC)

The increase in total cost from producing one additional unit of output.

Law of Diminishing Marginal Returns

As more of a variable input is added to a fixed input, the additional output generated will eventually decrease.

Demand Curve

A curve that typically slopes downward, indicating that as price decreases, quantity demanded increases.

Average Revenue (AR)

In perfectly competitive markets, it is equal to market price.

Total Revenue (TR)

The income a firm receives from selling its products, calculated as price times quantity.

Marginal Revenue (MR)

The additional revenue gained from selling one more unit of output.

Normal Profit

Occurs when total revenue equals total costs, resulting in zero economic profit.

Abnormal Profit

Occurs when total revenue exceeds total costs, leading to positive economic profit.

Loss

Occurs when total revenue is less than total costs, leading to negative economic profit.

Profit Maximization

The strategy where a firm aims to produce at the point where marginal revenue equals marginal cost.

Corporate Social Responsibility (CSR)

When a business considers public interest in its decision making and adopts ethical standards.

Satisficing

When an economic agent aims for satisfactory performance instead of maximum levels.

Growth Maximization

A strategy where firms aim to increase market share rather than maximizing short-term profits.

Revenue Maximization

A strategy where firms aim to produce where marginal revenue equals zero.