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| Profit = Total revenue – Total cost |
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Definition
Total revenue-the amount a firm receives from the sale of its output
Total cost- the market value of the inputs a firm uses in production |
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Definition
| require an outlay of money, e.g., paying wages to workers |
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| do not require a cash outlay, e.g., the opportunity cost of the owner’s time. |
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Definition
| total revenue minus total explicit costs |
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Definition
| total revenue minus total costs (including explicit and implicit costs) |
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| what is a production function? |
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Definition
| A production function shows the relationship between the quantity of inputs used to produce a good and the quantity of output of that good |
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Term
| The marginal product of any input is... |
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Definition
the increase in output arising from an additional unit of that input, holding all other inputs constant.
Examples: ΔQ = change in output
ΔL = change in labor
Marginal product of labor (MPL)=
change in output/change in labor |
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| Diminishing marginal product: |
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Definition
| the marginal product of an input declines as the quantity of the input increases (other things equal) |
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Term
EXAMPLE 1: Farmer Jack’s Costs
-Farmer Jack must pay $1000 per month for the land, regardless of how much wheat he grows.
-The market wage for a farm worker is $2000 per month.
-So Farmer Jack’s costs are related to how much wheat he produces…
... Is an example of? |
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Definition
| Diminishing marginal product |
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Term
| Marginal Cost (MC) is the... |
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Definition
increase in Total Cost from producing one more unit:
MC= ΔTC/ΔQ |
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Definition
do not vary with the quantity of output produced.
-For Farmer Jack, FC = $1000 for his land
-Other examples: cost of equipment, loan payments, rent |
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Term
| Variable costs (VC) vary with what? |
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Definition
the quantity produced.
-For Farmer Jack, VC = wages he pays workers
-Other example: cost of materials
Total cost (TC) = FC + VC |
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Term
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Definition
equals total cost divided by the quantity of output:
ATC = TC/Q
Also,
ATC = AFC + AVC |
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Term
| Some inputs are fixed (e.g., factories, land). The costs of these inputs are FC. |
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| All inputs are variable (e.g., firms can build more factories, or sell existing ones). |
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