Microeconomics chapter 7

firm

business organization that employs resources to produce goods or

services for profit

firm goal

profit maximization

Profit

Total revenue minus total cost

Total revenue

the amount a firm receives from selling its product. Price of product times quantity

Total cost

The markets value of the inputs a firm uses for production. Wages, interest, rent, etc

Accounting profit

Total revenue - explicit costs

Economic profit

Total revenue - explicit and implicit costs

Explicit cost

expenses firms must take account of because they must be paid. rent, salaries, taxes

Implicit cost

expenses firms dont pay out of pocket and dont normally account. Depreciation, cost of time, land

Marginal product

The increase in output that comes from a additional increase of that input

Three types of marginal product

Marginal product of labor (1 more worker), capital (1 more machine), and land (1 more acre of land).

Law of diminishing marginal returns

marginal products must eventually fall

Why does the law of diminishing returns happen

Even though we can hire 100 more workers tomorrow, we can’t always buy more machines in the short-run (capital can take time to build)

○ Management is having trouble monitoring and running things

smoothly on a much larger scale

Fixed costs

costs that do not vary with output produced

Variable costs

costs that vary with the amount of output produced

Total costs equation

Fixed costs + variable costs

Average costs

Cost of each unit produced, divide firm costs by quantity of output

When does a firm maximize profit

marginal revenue = marginal cost

Average fixed cost (AFC)

fixed cost/quantity

Average variable cost (AVC)

variable cost/quantity

Average total cost (ATC)

total cost/quantity

Marginal cost (MC)

Change in total cost/quantity

FC

fixed costs

VC

variable costs

When MC<ATC

ATC is falling

When MC>ATC

ATC is rising

Laws of the MC curve

The marginal cost curve will always intersect average total cost at its minimum

Economies of scale

long-run average total cost falls as the quantity of output increases (mass production of resources)

Diseconomies of scale

long run average total cost rises as the quantity of output increases Ex: diamonds

Constant returns to scale

long run average total cost stays the same as the quantity of output increases