Econ 201 ch 7

opportunity cost of resources employed by afirm that takes the form of cash payments

a firms's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment

a firm's total revenue minus its explicit costs

this profit is used to determine a firm's taxable income

firm's total revenue minus its explicit and implicit costs

takes into account the opportunity cost of all resources used in production

accounting profit earned when all resources earn their opportunity cost

any accounting profit in excess of a normal profit is economic profit

any resource that can be varied in the short run to increase or decrease production

any resource that cannot be varied in the short run

• a period during which at least one of a firm's resources is fixed
• a planning horizon

a period during which all resources under the firm's control are variable

a firm's total output

the relationship between the amount of resources employed and a firm's total product

the change in total product that occurs when the use of a particular resource increases by one unit, all other resources constant

the marginal product of a variable resource increases as each additional unit of that resource is employed

as more of a variable resource is added to a given amount of another resource, marginal product eventually declines and could become negative

any production cost that is independent of the firm's rate of output

any production cost that changes as the rate of output changes

• when marginal product is rising, total product increases by increasing amounts.
• When marginal product is falling but still positive, total product increases by decreasing amount.
• When marginal product equals 0, total product is at a maximum.
• When marginal product is negative, total product is falling

TC=FC+VC

• chang in total cost resulting from a one unit change in output
• MC=ΔTC/Δq

• fixed cost is $x at all levels of output
• variable cost starts from origin and increases slowly at first as output increases
• when the variable resource generates diminishing marginal returns, variable cost begins to increase more rapidly
• total cost is the vertical sum of fixed cost and variable cost
• marginal cost first declines, reflecting increasing marginal returns, and then increases, reflecting diminshing marginal returns

AVC=VC/q

• ATC=TC/q
• ATC=AFC=AVC

• average variable cost and average total cost curves first decline, reach low points, and then rise
• overall they have U shapes
• when marginal cost is below average variable cost, average variable cost is falling
• when marginal cost equals average variable cost, average variable cost is at its minimum
• when marginal cost is above average variable cost, average variable cost is increasing
• the same is true for marginal cost and average total cost

• forces that reduce a firm's average cost as the scale of operation increases in the long run
• a larger size often allows for larger, more specialized machines and greater specialization of labor

• forces that may eventually increase a firm's average cost as the scale of operation increases in the long run
• ie as amt and variety of resources employed increases, so does the task of coordinating all the inputs

diseconomies of scale result from a larger firm size, whereas diminishing marginal returns result from using more variable resources in a firm of given size

short-run average total cost curves form the long-run average cost, or planning, curve

• a firm's planning curve
• connects portions of the short-run average cost curves that are lowest for each output rate
• a curve that indicates the lowest average cost of production at each rate of output when the size or scale of the firm varies
• each point of tangency between a short-run average cost curve and the long-run average cost curve represents the least-cost way of producing that particular rate of output

a cost that occurs when, over some range of output, long-run average cost neither increases nor decreases with changes in firm size

the lowest rate of output at which a firm takes full advantage of economies of scale