Economics 1.3.1

SA3 Review Part 1: Economic Profit, the Law of Diminishing Returns, MC and AC

Total Costs (TC)

Total cost of production

TFC + TVC

Average Cost (AC)

Cost of producing each unit

TC/Q

Marginal Cost (MC)

Extra cost of producing one more unit

△TC/△Q

Marginal Product (MP)

The extra output gained from employing one more unit of variable input

△Output/△Input

Total Revenue (TR)

Total money earned from sales

PxQ

Marginal Revenue (MR)

Extra revenue earned from selling one more unit

△TR/△Q

Accounting Profit

Profit that only includes actual monetary payments made by the firm
TR - Explicit Costs

Economic Profit (π)

Profit after including both explicit and implicit costs

TR - (Explicit Costs + Implicit Costs)

(P - AC) xQ

Explicit Costs

Expenses that have a clearly defined monetary amount and must be paid for.

Implicit Costs

Opportunity costs that arise when a firm uses its resources for one particular purpose rather than an alternative purpose.

Normal profit

TR - TC = 0

Supernormal Profit

TR - TC > 0

Subnormal Profit

TR - TC < 0

Law of Diminishing Returns

A principle in economics that assumes that after some point, as variable resources are added to a production process where there are fixed resources, the marginal product will begin to decline.

Short-run

A period of time in which there is at least one fixed resource.

Long-run

A period of time long enough for all resources to become variable.

Fixed Resource

A resource for which the quantity/size cannot vary in the short-run.

Variable Resource

A resource for which the quantity/size can vary in the short-run.

Division and Specialization of Labor

Breaking down complex production processes into smaller, specialized tasks assigned to specific workers to maximize efficiency, productivity, and output.

Causes MP curve to rise and MC curve to fall.