Why do we need to calculate average costs?
The numbers are more manageable and allow us to compare them directly with price and determine profitability.
Why do we break the ATC into it’s two components: AFC and AVC? (Two reasons)
- Examining AFC alone helps us see that it is an ever-decreasing function of output. (The more output a firm produces, the more it spreads out it’s total fixed cost)
- AVC will be used later to determine whether a firm that is losing money should continue to operate or it should shut down in the short run.
In deciding on how much output should be produced to maximize profits, firms need two pieces of information:
- ___
- ___
- Marginal cost (cost associated with producing an additional unit of output)
- Marginal revenue (extra benefit associated with producing that unit of output)
If MC > ATC, then ATC ___.
↑
If MC > AVC, then AVC ___.
↑
If MC < ATC, then ATC ___.
↓
If MC < AVC, then AVC ___.
↓
If MC = ATC, then ATC ___.
Remains unchanged
If MC = AVC, then AVC ___.
Remains unchanged
___ is the cost associated with the use of resources; the sum of explicit and implicit costs.
Economic costs
___ are monetary payments made by individuals, firms, and governments for the use of land, labor, capital, and entrepreneurial ability owned by others; also called accounting costs.
Explicit costs (seen)
___ is the opportunity costs of using owned resources; costs which no monetary payment is explicitly made.
Implicit (unseen)
Accounting profit is ___.
TR - explicit costs
Economic profit is ___.
TR - economic costs
Economic costs are ___.
Explicit costs - implicit costs
Total revenue is ___.
Price (Qt)
Zero accounting profit means ___. When Implicit costs are taken into account then ___.
You’re making enough to cover all monetary expenses.
Your economic profit is negative, which isn’t good
Zero economic profit means ___.
Your revenues are covering all explicit and implicit costs - you’re doing just as well as you could in your next-best option.
___ is the time period in which at least one input of production is fixed, but other inputs can be changed.
Short-run
___ is the total amount of output produced when given the amount of resources.
Total product (TP)
___ is the additional output produced as a result of utilizing one more unit of variable resource.
Marginal product (MP)
___ is the average amount of output produced per unit of a resource employed.
Average product (AP)
___ is a characteristic of production whereby the marginal product of the next unit of variable resource utilized is greater than that of the previous variable resource.
I.e., not enough employees resulting in overworked employees
Increasing marginal returns
___ is a characteristic of production whereby the marginal product of the next unit of a variable resource utilized is less than that of the previous variable resource.
I.e., too many employees resulting in less productive hours
Diminishing marginal returns
