Untitled Flashcards Set

Econ Module 5

• Firms profit

  • Total revenue 

    • Amount of money firm receive

  • Total Cost Amount firm produce items 

    • Example: parts for the items

  • Profit = Total Revenue - total Cost

• Cost of Production

  • Explicit Costs (cash)

    • Out of pocket (easily visible)

  • Implicit Costs (non-cash)

    • Not apparent (not easily visible)

  • Sunk Costs

    • Can not be recovered cash or no cash

• Accounting Profit vs Economic Profit

  • Economic Profit

    • Total Revenue - Opportunity Cost

    • Total Revenue - Explicit Cost - Implicit Cost 

  • Accounting Profit 

    • Total Revenue - Explicit Cost

  • Economic Profit (based on accounting profit)

    • Accounting Profit - Implicit Cost

      • Accounting profit = TR - Explicit Cost and since economic profit = TR - EC - IC we can simplify it by substituting accounting profit for TR and EC

  • Accounting Profit (based on economic profit)

    • Explicit Profit = Economic Profit + implicit Cost.

  • Opportunity Costs

    • Include: 

      • Explicit Costs 

        • Direct money outlay for factors of production

      • Implicit Costs

        • No direct money outlay

    • Accountants

      • Often ignore implicit Costs and mainly focus on explicit costs

        • TR - Explicit Costs

    • Economists 

      • Look at both Explicit and Implicit costs when measuring total Costs

      • TR - Explicit - implicit or (Accounting profit - implicit)

    • Sunk Costs

      • Costs that have been made and can’ be recovered

      • Usually ignored when making designs

  • Average Product vs Marginal Product

    • Marginal Product 

      • Increase in output from an additional unit of input

      • Diminishing Marginal Product

        • Marginal Product of an input declines as the input increases (beyond a certain point)

    • Average Product 

      • Output per unit of input

  • Total Fixed Cost (TFC)

  • Total Variable Costs (TVC)

  • Total Costs

    • TC = TFC + TVC

  • Average Fixed Costs (AFC) = TFC / Q

    • Fixed cost per unit of output

  • Average Variable Costs (AVC) = TVC / Q

    • Variable cost per unit of output

  • Average Total Costs (ATC) = TC / Q

  • Costs in the Short run

    • ATC - (AFC + AVC)

    • Marginal Costs

      • No impact on MC

    • Shape of average and Marginal Costs

      • MC is the opposite of an L (the shape of the graph)

      • ATC is L shape but higher

      • AVC like a really stretched out U

    • Shape depends on:

      • Productivity of inputs

      • Marginal product of each input decreases

      • DmR causes the MC to increase the SR

      • In turn, ATC & AVC get affected

    • ATC 

      • U shaped 

      • At low levels of output, ATC declines

      • At higher levels, ATC increases