ECON 101 Chapter 5

• (Price x Amount Sold) = Total Revenue
• Profit = Total Revenue - Total Cost
• Explicit costs are physical costs that involve monetary payment

  • Employee wages, utilities, equipment
• Implicit costs is the opportunity cost that occurs for allocation of resources. - cannot be assigned monetary value.

  • for example, an employee gives up a day of work to train a new employee - the implicit cost is the time required to train an employee
• Accounting profit = Total Revenue - Explicit Costs
• Economic profit = Total Revenue - Explicit Costs - Implicit Costs
• Economic Costs = Explicit Costs + Implicit Costs
• Accounting Costs = Explicit Costs - Revenue
• Sunk costs are costs that have already been made and cannot be recovered

  • ex. Business license
• Production function is the relationship between quantity of inputs (resources) and output (product produced)
• Marginal Product is an increase in output from an additional unit of input

  • Can be negative
• Marginal product = ∆ in total production / ∆ in labour

  OR

  Marginal product = ∆ in quantity / ∆ in labour
• Total Production = Quantity

  TP=Q
• Average Product is the output per unit of input

  • Never negative
• Average Product = Total Product / Labour

  OR

  Average Product = Quantity / Labour
• Diminishing Marginal Product occurs when Marginal Product of an input declines as the input increases.

  • As input increases, Marginal Product declines
• Short-Run costs have two components of total costs, fixed & variable

  • at least one fixed input - does not vary with output
  • variable costs - vary with output
• Average Fixed Costs = Total Fixed Costs / Q

  • fixed cost per unit of output
• Average Variable Costs = Total Variable Costs / Q

  • variable costs per unit of output
• Average Total Costs = Total Costs / Q

  • total cost per unit of output
• Total Costs = Total Fixed Cost + Total Variable Costs
• Total Variable Costs vary with the amount of output produced
• Total Fixed Costs are fixed & do not change with the amount of output produced
• Marginal Cost is the additional cost of producing one more unit of output
• Marginal Cost = ∆ in Total Cost / ∆ in Output

  OR

  Marginal Cost = ∆ in Total Variable Cost / ∆ in Output
• Marginal Cost = Average Variable Cost
• Average Fixed cost is a continuously declining curve
• Average Variable Cost is a U-Shaped curve
• Marginal Cost is a U-Shaped curve
• Average Total Cost is a U-shaped curve
• Marginal Cost & Average Cost are mirror images of Marginal Product & Average Product
• Long-Run Costs inputs are all variable. there is no fixed cost, all costs are variable

  • Total Cost & Total Variable Costs are the same
  • Average Total Cost & Average Variable Costs are the same
• Economies of Scale show a Declining Long-Run Average Total Cost

  • volume discount, lower borrowing costs, lower storage, transportation and promotion costs
• Constant Economies of Scale show a constant Long-Run Average Total Cost

  • mostly from fixed production function & little storage, transportation & promotion costs
• Diseconomies of Scale show an increasing Long-Run Average Total Cost

  • primarily management diseconomies
• Marginal Product is calculated by the difference in output from top to bottom of the product category
• Marginal Cost is calculated by the difference in cost from top to bottom of the cost category
• A firm's opportunity cost of production is equal to its explicit cost + implicit cost
• If a production system has a fixed cost, it is short-run
• If a production system has no fixed cost, it is long-run