Economics: Production Functions, Costs, and Profit Analysis

Production Function

relationship between quantity produced and how many inputs (Q and L)

Firm

Organization that produces goods and services for sale

Product Curve

The change in output that results from employing an added unit of labor. MPL (∆Q/∆L). An illustration of the production function.

When does MPL reach max production?

When MPL = 0

When does a graph experience "increasing returns"

when slope is increasing

When does a graph experience "inflation" (MPL)

When slope is negative

When does a graph experience "diminishing returns"

When slope is decreasing, but still positive. (inflection point)

Explicit cost

Costs a business or individual receive when they directly pay for somth (visible)

Implicit cost

Costs an individual incurs when they choose one alternative over the other. (doesn't always relate to money)

eg: if u open a bakery, costs of being able to win a salary from a standard 9-5

fixed input

an input whose quantity is fixed for a period of time and cannot be changed

-in the short run at least one

varied input

input whose quantity is can change at any time.

-in the long run all inputs are varied

long run

all inputs can be varied.(changed)

short run

at least one input is fixed.

long run

all inputs can be changed (varied)

Total product

add all of MPL

Fixed Cost

Independent of output

Variable cost

dependent on output (eg output goes down cost goes down vice versa)

Opportunity Cost

Explicit + Implicit

Accounting Profit

total revenue - explicit costs

Total Revenue

Profit x Quantity

Economic Profit

Total Revenue - Opportunity cost

Normal Profit

Economic Profit = 0

EP>0

EP=0

EP<0

Good choice

normal profit

pick another alternative

Total Cost

fixed cost + variable cost

Marginal Cost

∆TC/Q

Fixed cost = Total cost

When quantity = 0