Chapter 6, Part 1

• What is the primary goal of firms?

  To maximize profits.
• How is profit calculated?

  Profit = Total Revenue - Total Cost.
• What does Total Revenue consist of?

  Total Revenue is the income from sales (Price * Quantity).
• What constitutes Total Cost?

  Total Cost is the market value of inputs used in production.
• Define Opportunity Cost.

  The cost of foregone alternatives, including both explicit and implicit costs.
• What are Explicit Costs?

  Direct, out-of-pocket expenses (e.g., wages).
• What are Implicit Costs?


  Indirect, non-monetary costs (e.g., owner's time).
• How is Economic Profit calculated?

  Economic Profit = Total Revenue - Total Costs (including both explicit and implicit costs).
• How is Accounting Profit calculated?

  Accounting Profit = Total Revenue - Explicit Costs only.
• What is the Implicit Cost of Financial Capital?

  The foregone interest income when capital is invested in the business.
• Give an example of Implicit Cost of Financial Capital.

  Investing €300,000 with a 5% interest rate results in an implicit cost of €15,000 annually.
• What is the Short Run in production?


  A period where some inputs cannot be changed.
• What is the Long Run in production?

  A period where all inputs can be varied.
• Define Production Function.


  Relationship between quantity of inputs and quantity of output (Q = f(K, L)).
• How is Average Product (AP) calculated?


  Output per unit of input (APL = Q/L, APK = Q/K).
• How is Marginal Product (MP) calculated?

  Additional output from an additional unit of input (MPL = ΔQ/ΔL, MPK = ΔQ/ΔK).
• What is Diminishing Marginal Product?


  As more of an input is used, the additional output from each extra unit of input decreases.
• What is Total Cost (TC)?


  The cost of producing a given quantity of output.
• Why does Total Cost increase as output increases?

  Due to diminishing marginal returns.
• What does the Total Cost Curve represent?


  The total cost at various output levels.
• What are Fixed Costs (FC)?

  Costs that do not vary with output (e.g., rent).
• What are Variable Costs (VC)?

  Costs that vary with output (e.g., raw materials).
• How is Total Cost (TC) calculated?

  Sum of fixed and variable costs (TC(Q) = FC + VC(Q)).
• What is Average Total Cost (ATC)?

  Cost per unit of output (ATC = TC/Q).
• What is Marginal Cost (MC)?


  Cost of producing one more unit of output (MC = ΔTC/ΔQ).
• Why does Marginal Cost typically rise as output increases?

  Due to diminishing marginal returns.
• Describe the shape of the Average Total Cost (ATC) curve.

  U-Shaped; ATC decreases at first and then increases as output increases.
• What is the Efficient Scale?

  The output level that minimizes ATC.
• What is the relationship between MC and ATC when MC is less than ATC?

  ATC is falling.
• What is the relationship between MC and ATC when MC is greater than ATC?

  ATC is rising.
• Where does MC intersect ATC?

  At its minimum point.
• Accounting profit is generally greater than economic profit, because accountants do not consider costs in their calculations.
• The law of diminishing marginal product of labour occurs when every additional worker hired contributes a smaller increase in production than previously hired workers.
• If the marginal product of labour is 1 when going from 9 to 10 workers, employing the 10th worker will increase output by 1