Chapter 3 - The Costs of Production and Profit Maximization

total costs

The sum of fixed costs and variable costs.

fixed costs

Costs that do not vary with changes in the quantity produced are called fixed costs. 4. variable costs - Costs that do vary with changes in the quantity produced are called variable costs.

short run

The short run is a time horizon within which a business is unable to adjust at least one input. In other words, in the short run there exists some fixed cost.

total revenue

Total revenue is calculated by multiplying price and quantity.

economies of scope

When an organization can produce several products together at less cost than could a group of single product firms operating independently.

marginal revenue

Marginal Revenue is the change in total revenue generated from an additional unit sold. It is calculated by taking the change in total revenue divided by the change in quantity sold.

marginal costs

Marginal cost is equal to the change in the total cost that arises from an extra unit of production. It is calculated by taking the change in total cost and dividing it by the change in the quantity produced.

average variable costs

Average variable cost equals the variable cost divided by the quantity produced.

perfect competition

An industry with many buyers and many sellers. An industry in which the good is homogeneous. And it is an industry in which all who want to enter the industry are free to do so and any business may exit at a time of their choosing.

joint costs

Costs that do not change with changes in the scope of production.

shut down rule

A business should shut down if production at the profit maximizing quantity (where MR=MC) generates total revenues that are less than variable costs, in all other cases the business should stay open.

sunk costs

A cost that has already been committed and cannot be recovered.

diseconomies of scale

A range of output in which average total costs increase as output increases.

economies of scale

A range of production in which average total costs decline as output increases.

constant economies of scale

A range of production where average total costs remain constant as output increases.

monopoly

An industry controlled by a monopolist. A monopolist is a firm that is the only seller of a good. The good the monopolist sells is heterogeneous. And the market that the monopolist sells its product in has barriers to entry.

long run

The long run is a time horizon long enough for the seller to adjust all inputs. Thus, if you observe a business with no fixed costs, then it is in a long run state.

the profit maximizing rule

The profit maximizing rule states that a business maximizes profits when it produces where the marginal revenue from selling another unit equals marginal cost of producing an additional unit.

average fixed costs

Average fixed cost equals fixed cost divided by the quantity produced.

average total costs

Average total cost equals the total cost divided by the quantity produced or it is the sum of average fixed cost plus average variable cost.