Ch. 12: The Costs of Production
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29 Terms
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industrial organization
the study of how firms’ decisions about prices and quantities depend on the market conditions they face
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the goal of a firm is to ________ profit
maximize
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profit formula
total revenue - total cost
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total revenue
amount a firm receives for the sale of its output
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total revenue formula
price \* quantity
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total cost
market value of the inputs a firm uses in production
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costs as opportunity costs
the cost of something is what you give up to get it
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what do firm’s cost of production include?
all the opportunity costs of making its output of goods and services
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explicit costs
input costs that require an outlay of money by the firm
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implicit costs
input costs that do not require an outlay of money by the firm; ignored by accountants
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total costs formula
explicit costs + implicit costs
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economic profit formula
total revenue - total cost (includes explicit and implicit)
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accounting profit formula
total revenue - total explicit cost
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production function
relationship between quantity of inputs used to make a good and the quantity of output of that good; gets flatter as production rises
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marginal product
increase in output that arises from an additional unit of input; slope of the production function
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diminishing marginal product
marginal product of an input declines as the quantity of the input increases
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total-cost curve
relationship between quantity produced and total costs; gets steeper as the amount produced rises
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fixed costs
costs that do not vary with the quantity of output produced
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variable costs
costs that vary with the quantity of output produced
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total cost cost formula
fixed cost + variable cost
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average fixed cost formula
fixed cost / quantity of output
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average variable cost formula
variable cost / quantity of output
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average total cost formula
total cost / quantity of output
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marginal cost
increase in total cost arising from an extra unit of production
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marginal cost formula
change in total cost / change in quantity
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efficient scale
quantity of output that minimizes average total cost
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what happens when marginal cost < average total cost?
average total cost is falling
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what happens when marginal cost > average total cost?
average total cost is rising
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where does the marginal-cost curve cross the average-total-cost curve?
at its minimum