Total Revenue

The amount a firm receives for the sale of its output

Total Cost
the market value of the inputs a firm uses in production (TC=FC+VC)
Profit
total revenue minus total cost (TR-TC)
Explicit Costs
input costs that require an outlay of money by the firm (ex. when money flows out of the firm
to pay for raw materials, workers' wages, rent and so on)
Implicit Costs
input costs that do not require an outlay of money by the firm (ex. the value of the income
forgone by the owner of the firm had the owner worked for someone else plus the forgone
interest on the financial capital that the owner invested in the firm)
Economic Profit
total revenue minus total cost, including both explicit and implicit costs (EP=TR-(EC+IC))
Accounting Profit
total revenue minus total explicit cost (AP=TR-EC)
Production Function
the relationship between quantity of inputs used to make a good and the quantity of output of
that good
Marginal Product
the increase in output that arises from an additional unit of input
Diminishing Marginal Product
the proper whereby the marginal product of an input declines as the quantity of the input
increases
Fixed Costs
costs that do not vary with the quantity of output produced (FC)
Variable Costs
costs that vary with the quantity of output produced (VC)
Average Total Cost
total cost divided by the quantity of output (ATC=TC/Q)
Average Fixed Cost
fixed cost divided by the quantity of output (AFC=FC/Q)
Average Variable Cost
variable cost divided by the quantity of output (AVC=VC/Q)
Marginal Cost
the increase in total cost that arises from an extra unit of production (MC=∆TC/∆Q)
Efficient Scale
the quantity of output that minimizes average total cost
Economies of Scale
the property whereby long-run average total cost falls as the quantity of output increases
Diseconomies of Scale
the property whereby long-run average total cost rises as the quantity of output increases
Constant Returns to Scale
the property whereby long-run average total cost stays the same as the quantity of output
changes
What is the relationship between a firm's total revenue, profit, and total cost?
A firms profit equals total revenue minus total cost
Give an example of an opportunity cost that an accountant might not count as a cost. Why
would the accountant ignore this cost?
Opportunity cost is where money does not change hands does not count as a cost. Anexample
of this is the owner's opportunity cost for an alternate employment, since moneydoes not
change hands. The accountant would ignore this cost as no cash flow hasoccurred to cause an
effect in the balance sheet.
What is marginal product, and what does it mean it is is diminishing?
It is the increase in output by adding one more unit of labour. The law of diminishing returns
means that new inputs eventually fail to increase output.
How are total cost, average total cost, and marginal cost related?
Marginal costs equals the change in total cost or the change in variable cost. That is
becausetotal cost equals variable cost plus fixed cost and fixed cost does not change as the
quantitychanges. So as quantity increases, the increase in total cost equals the increase in
variablecost and both are equal to marginal cost
How and why does a firm's average-total-cost curve differ in the short run and in the long
run?
in the long run a firm can adjust the factors of production that are fixed in the short run
Define economies of scale and explain why they might arise.
Economies of scale are the inverse relationship between quantities produced and fixed price.
The greater the quantity of a good produced, the lower the per-unit fixed cost because these
costs are shared over a larger number of goods. they may be caused by increased
specialization among workers as the factory get larger
Define diseconomies of scale and explain why they might arise.
Diseconomies of scale occur when long-run average total cost rises as the quantity of output
increases, which occurs because of coordination problems inherent in a larger organization.
Why does MC curve always intersect with the ATC curve at its lowest point?
because MC is a part of ATC. When MC<ATC each new unit lowers the ATC. If you have
an average and you add another number that is lower than the average to it and then you take
the new average, it has to go down. This means that for as long as MC is less than ATC, ATC
will go down with each extra unit made. Now as MC keeps rising, it is now greater than
ATC. This means that ATC has to go up because every new unit produced increases ATC.
What are accountants normally only concerned with?
the firm's flow of money, so they record only explicit costs
What are economist concerned with?
the firm's decision making, so they are concerned with total opportunity cost, which are the
sum of explicit costs and implicit costs.
What does the total-cost curve show?
the relationship between the quantity of output produced and the total cost of production.
What must a producer need to know to determine the optimal amount of output to produce?
the cost of the typical unit of output and the cost of producing one additional unit (or MC)
How is the cost of a typical unit determined?
ATC (TC/Q, or (AFC+AVC)/Q)
What is true about marginal product and marginal cost at low levels of production?
the marginal product of an extra worker is large, so the marginal cost of another unit of
output is small
What is true about marginal product and marginal cost at high levels of production?
the marginal product of an extra worker is small, so the marginal cost of another unit of
output is large