chapter 14 - costs of production

TR

P • Q

profit

TR - TC

TC

FC + VC

fixed costs

costs that don’t change in the short run

variable costs

costs that vary with qty of output produced

explicit costs

costs that are specific input or materials to create a product, measured by accountants

implicit

other inputs such as labor, time and depreciation that goes into cost of producing something, measured by economists not accountants

production function

relationship between qty of inputs used to make a good and qty of output of the good

marginal product

increase in output from producing 1 more unit

diminishing marginal product

input declines as qty of input increases

efficient scale

qty of output that minimizes ATC

ATC falls when

MC < ATC

ATC rises when

MC > ATC

economies of scale

long run ATC falls as output decreases

diseconomies of scale

long run average rises as qty of output increases

efficient scale

ATC = TC/Q

total cost curve

difference between accounting and economic profit

ATC

ATC = FC/Q

AFC

AFC = FC/Q

AVC

AVC = VC/Q

MC

MC = ^TC/^Q