Production Costs
What is Marginal Product (MP)?
Change in Quantity divided by Change in Labour (change in Q / change in L)
What are Implicit Costs?
Costs that do not require money spending. (Time, Opportunity Cost)
What is Total Variable Cost (TVC)?
Costs that fluctuate with quantity produced (i.e. wages, materials)
What are Explicit Costs?
Costs that requires money use and spending. ($)
What is Total Cost (TC)?
"Expenses" of inputs in firm production (i.e. Wages). TFC + TVC
What is Total Revenue (TR)?
"Income" received from sale of firm's outputs. P x Q
What is Profit?
"Net Amount" from Total Revenue minus Total Cost
Marginal Product:
A small change in input unit (additional unit) - all other inputs constant
Average Total Cost in relation to TFC and TVC:
ATC = AFC + AVC TC/Q = TFC/Q + TVC/Q
Average Total Cost Formula:
ATC = TC/Q
What are Constant Returns to Scale?
ATC does not change as Q changes (increases or decreases)
What are Diseconomies of Scale?
ATC falls as Q increases
What are Economies of Scale?
ATC falls as Q increases
What are Short Run Costs?
Fixed input costs. (e.g. factories and land)
What is Marginal Cost (MC)?
Increase of Total Cost from making one additional product
Production Function:
Inputs (labor and capital) and Outputs (quantity) of producing a good.
Marginal Cost Formula:
MC = Change in TC / Change in Q
Profit Formula
Profit = Total Revenue - Total Cost
What is Total Fixed Cost (TFC)?
Stable Costs as quantity produced (i.e. equipment cost, loan payments, insurance, and rent)
TFC + TVC =
TC
Total Cost Formula:
TC = TFC + TVC
TC - TVC =
TFC
TC = TVC if
TFC = zero
TC - TFC =
TVC
What is Total Cost (TC)?
The sum of Fixed Cost and Variable Cost.
What is Average Total Cost (ATC)?
Total Cost divided by output quantity or TC/Q
Economic Profit:
Total Revenue minus Total Cost (Explicit and Implicit)
Accounting Profit:
Total Revenue minus Total Explicit Cost, higher in profit - does not include Implicit Costs.
What are Long Run Costs?
Variable Costs. (e.g. more factories built or sold)
long run
all costs are variable, no fixed costs
short run
at least one cost is fixed
as quantity (output) increases
average fixed cost decreases
If a firm shuts down in the short run
profit = negative TFC
TVC = zero if
total cost equal fixed cost
as quantity increases
total fixed cost does not change
as quantity (output) increases
total variable cost increase
TC = TFC if
total variable cost is zero