What is Profit?
Net Amount" from Total Revenue minus Total Cost
Profit Formula
Profit = Total Revenue - Total Cost
What is Total Revenue (TR)?
Income" received from sale of firm's outputs
What is Total Cost (TC)?
Expenses" of inputs in firm production (i.e. Wages)
What are Explicit Costs?
Costs that requires money use and spending. ($)
What are Implicit Costs?
Costs that do not require money spending. (Time, Opportunity Cost)
Accounting Profit:
Total Revenue minus Total Explicit Cost, higher in profit - does not include Implicit Costs.
Economic Profit:
Total Revenue minus Total Cost (Explicit and Implicit)
Production Function:
Inputs and Outputs of producing a good. (i.e. workers, products, equipment)
Marginal Product:
A small change in input unit (additional unit) - all other inputs constant
What is Marginal Product of Labour (MPL)?
Change in Quantity divided by Change in Labour (Q/L)
MPL is beneficial if:
Graph is presented in a Positive Slope
Diminishing Marginal Product:
When Marginal Product input Decreases while all other inputs Equally Increase.
What is Marginal Cost (MC)?
Increase of Total Cost from an additional product
Marginal Cost Formula:
MC = Change in TC /Change in Q
What is Fixed Cost (FC)?
Stable Costs as quantity produced (i.e. equipment cost, loans and rent)
What is Variable Cost (VC)?
Unstable Costs as quantity produced (i.e. wages)
What is Total Cost (TC)?
The sum of Fixed Cost and Variable Cost.
Total Cost Formula:
TC = FC +VC
What is Average Total Cost (ATC)?
Total Cost divided by output quantity
Average Total Cost Formula:
ATC = TC/Q
Average Total Cost in relation to FC and VC:
ATC = AFC + AVC
TC/Q = FC/Q + VC/Q
Efficient Sale:
The Point where ATC is Minimal (on graph)
What are Short Run Costs?
Fixed input costs. (e.g. factories and land)
What are Long Run Costs?
Variable Costs. (e.g. more factories built or sold)
Which Cost is more efficient?
Long Run; smallest ATC.
What is LRATC?
Long-Run Average Total Cost.
What are Economies of Scale?
Increasing Production = Greater Specialization (Narrow Task)
ATC - Decreases, Q - Increases
What are Constant Returns to Scale?
ATC - Constant, Q - Increases
What are Diseconomies of Scale?
Large Organization Coordination problems.
ATC - Increases, Q - Increases