Microeconomics - Thornton - Ch. 13

Fixed Costs

-Costs that do not vary with the quantity of output produced; they are incurred even if the firm produces nothing at all

Variable Costs

-Costs that vary with the quantity of output produced -Examples: coffee beans, milk, sugar, and paper cups: the more cups of coffee makers, the more of these items are needed; similarly if more workers are needed to make more cups of coffee, the salaries of these workers are the xxx costs

Average Fixed Cost

-Fixed cost divided by the quantity of output -Formula: AFC= FC/Q

Total-Cost Curve

-Gets steeper as the amount produced rises, whereas the production function gets flatter as production rises

Implicit Costs

-Input costs that do not require an outlay of money by the firm (does not require cash pay out)

Explicit Costs

-Input costs that require an outlay of money by the firm (the firm must pay out some money)

Explicit & Implicit Costs - Economists View

-Interested in studying how firms make production and pricing decisions; these decisions are based on both explicit and implicit costs

Total Revenue

-The amount a firm receives for the sale of its output -Formula: TR=PxQ - Price x Quantity -Example: the amount received for the sale of cookies

Outputs

-The final product that is for sale -Example: cookies

Marginal Product

-The increase in output that arises from an additional unit of input -As the number of workers increases this decreases

Marginal Cost

-The increase in total cost that arises from an extra unit of production -Change in total cost/Change in quantity -Tells us the increase in total cost that arises from producing an additional unit of output -Formula: MC= ChangeTC/ChangeQ

Total Cost

-The market value of the inputs a firm uses in production -Formula: TC=TFC+TVC - Total Fixed Cost + Total Variable Cost -Example: the cost of products needed to produce the final good, such as flour, sugar, workers, ovens, etc.

Diminishing Marginal Product

-The product whereby the marginal product of an input declines as the quantity of the input increases -Example: (Figure 2 - Page 264) Production function's slope ("rise over run") tells us the change in output of cookies ("rise") for each additional input of labor ("run")

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

Efficient Scale

-The quantity of output that minimizes average total cost

Production Function

-The relationship between quantity of inputs used to make a good and the quantity of output of that good -Example: the relationship between workers (inputs) and quantity of cookies (outputs)

Inputs

-The things necessary to produce a final good -Example: flour, sugar, workers, ovens, and so forth

Explicit & Implicit Costs- Accountants View

-Their job is to keep track of how the money flows into and out of the firms; they tend to measure the explicit costs but usually ignore the implicit costs

Average Total Cost

-Total cost divided by the quantity of output -Total cost is the sum of fixed and variable costs, xxx can be expressed as the sum of average fixed cost and average variable cost -Tells us the cost of a typical unit of output if total cost is divided evenly over all the units produced -Formula: ATC= TC/Q

Profit

-Total revenue minus total cost -Formula: Profit=TR-TC

Economic Profit

-Total revenue minus total cost, including both explicit and implicit costs -An important concept because it is what motivates the firms that supply goods and services -A firm is making economic losses (that is, when economic profits are negative), the business owners are failing to earn enough revenue to cover all the costs of production

Account Profit

-Total revenue minus total explicit cost

Average Variable Cost

-Variable cost divided by the quantity of output -Typically rises as output increases because of diminishing marginal product -Formula: AVC= VC/Q