Unit 3 Econ Micro

Revenue

Money you take in, calculated as Price (P) times Quantity (Q).

Costs

What you pay for production.

Profit

What you keep after costs are deducted from revenue.

Fixed Costs

Costs that do not change with production level, e.g., rent.

Variable Costs

Costs that change with the level of output, e.g., raw materials.

Total Costs

The sum of fixed costs and variable costs.

Explicit Costs

Out-of-pocket costs that are cash expenses.

Implicit Costs

Opportunity costs representing the value of resources in their next best use.

Accounting Profit

Total Revenue minus explicit costs.

Economic Profit

Total Revenue minus explicit costs and implicit costs.

Total Physical Production (TP)

Total output or quantity produced.

Marginal Product (MP)

Additional output generated by adding one more unit of input (e.g., additional workers).

Average Product (AP)

Output per unit of input, calculated as total product divided by units of labor.

Law of Diminishing Marginal Returns

As more input is added to a fixed amount of resources, the marginal product eventually declines.

Short Run

Time frame in which not enough time exists to change plant size; some costs are fixed.

Long Run

Time frame in which all costs are variable and the plant size can be changed.

Perfect Competition

A market structure characterized by many firms, identical products, easy entry, and firms as price takers.

Economic Profit

Occurs when price is greater than average total costs.

Breakeven Point

Occurs when price equals average total costs.

Economic Loss

Occurs when price is less than average total costs but greater than average variable costs.

Shutdown Point

Occurs when price is less than average variable costs.

Marginal Cost (MC)

The cost of producing one additional unit of output.

Marginal Revenue (MR)

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

Profit Maximizing Rule

Firms maximize profit when marginal costs equal marginal revenue (MC = MR).

Allocative Efficiency

Occurs when price equals marginal cost, producing the quantity desired by society.

Productive Efficiency

Occurs when price equals average total cost, indicating least-cost production.