(Microeconomics)
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Average Product (AP): total product divided by the number of labour inputs
Marginal Product (MP): change in production with an additional worker
Total product (TP): total production
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Increasing Marginal Returns: is the total product increasing at an increasing rate. At this point, the additional labour is productive to the market
Diminishing marginal returns: the additional factors of production lead to a decrease in output or productivity. Each additional worker will contribute less and less to the production of goods and services
Negative marginal returns: occurs when the total product is failing, and marginal revenue turns negative as the additional factors of production reduce productivity instead of add to it
MP and Marginal cost curves are mirror images of each other. The AP and average variable cost are also mirror images . When TP is at its highest point, MP turns negative.
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@@Production costs in the short run@@
Total costs include fixed costs and variable costs. In the short run, at least one factor of production will be fixed.
Total Fixed Costs (TFC): are those that do not vary with changes in output. In the short run, costs stay constant. These costs have to be paid even if the firm is not producing output. Example: rent, insurance, capital equipment
Total Variable costs (TVC): these costs vary as output changes. When there is no production, variable costs are zero. This includes changes in the number of employees, travel expenses, and energy costs.
Total Costs (TC): these costs are the sun of both variable and fixed costs
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@@Relationship between Cost and Product Curves@@:
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@@Important changes in cost curves is taxes:@@
The average cost does not change in this case
Lump-Sum Taxes: is a fixed and unchanging tax regardless of the amount a firm produces. This type of tax affects only fixed costs, and not variable. The lump-sum tax will not change or affect the amount produced, neither will it affect their price. The only curves that shift are the AFC and ATC, as ATC is the total of the variable and fixed costs.
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^^Type of Tax^^ | ^^Cost Curves Affected^^ |
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Per-unit tax (excise tax) | Marginal Cost (MC), Average total cost, average variable cost |
Lump-Sum tax | Average fixed cost, Average total cost |
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In the long run, all resources are variable, and inputs used in production can be changed. In the short run, at least one resource used in production will be fixed.
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^^Economies of Scale^^: are when the long run average total cost curve decreases as the output increases. This is equal to increasing returns to scale. When inputs are increased by a certain percentage, output increases more than the given percentage. This occurs when the firm increases its production with its first three factories.
^^Constant Returns to Scale^^: occurs when the long run average total cost curve remains constant as the production either increases or decreases
^^Diseconomies of scale^^: when the LR average total cost curve increases as a firm’s output increases.
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The way each of these profits measure costs is the main key difference between them. While accounting profit considers costs such as labour, rent, equipment and others, Economic profit is mainly concerned with not directly visible, implicit costs when calculating profit.
^^Accounting profit^^ is the net income of a company when revenue explicit costs are subtracted. This leads to accurate bookkeeping.
^^Economic profit^^ is that which is concerned with economic profit, which equals revenue subtracted from explicit and implicit costs.
A normal profit occurs when the condition of the economy equals zero economic profit. This means that the resources produced from a certain good or service cannot be made better of in any other activity.
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