Chapter 13

Study Notes

Economic vs Accounting Profit

Economic profit considers both explicit and implicit costs, while accounting profit only considers explicit costs.
Explicit costs are direct payments made by a company to its suppliers, employees, or lenders.
Implicit costs are the opportunity costs of using a firm's own resources, such as forgone wages or the opportunity cost of using owned capital.

Marginal Product of Labor

Marginal Product of Labor (MPL) refers to the additional output produced by adding one more worker while holding all other inputs constant.
MPL does not always increase as more workers are hired, it can decrease due to diminishing marginal returns.
Diminishing marginal returns occur when the addition of one more worker results in a smaller increase in output than the previous worker.

Fixed vs Variable Costs

Fixed costs do not change with the level of output produced in the short run.
Variable costs change with the level of output produced.
In the long run, all inputs are variable. This means all costs can be adjusted.

Average Fixed Costs

Average Fixed Cost (AFC) is calculated by dividing total fixed costs by the quantity of output.
AFC decreases as the quantity of output increases because fixed costs are spread over a larger number of units.

Explicit Costs

Explicit costs are direct payments made by a company to its suppliers, employees, or lenders.
Examples of explicit costs include wages, rent, utilities, materials, and interest payments on loans.

Average Total Cost

Average Total Cost (ATC) is calculated by dividing total cost by the quantity of output.
When marginal cost (MC) is below ATC, ATC will decrease.
When MC is above ATC, ATC will increase.
The relationship between MC and ATC explains the U-shaped curve of the ATC curve.

Marginal Product of Labor Formula

MPL = Change in total output / Change in labor input

Fixed Costs in the Short Run

In the short run, fixed costs are those that cannot be easily changed, such as rent, insurance, and salaries.
Variable costs in the short run are those that can be easily changed, such as wages, materials, and utilities.

Diseconomies of Scale

Diseconomies of scale occur when a firm's average total cost increases as the quantity of output increases.
Possible causes of diseconomies of scale include:
- Management difficulties: As a firm grows larger, it can become more difficult to manage effectively, leading to inefficiencies.
- Communication problems: Larger firms often have more complex communication networks, which can lead to delays and misunderstandings.
- Worker alienation: Larger firms may have more layers of management, which can make employees feel less connected to their work and less motivated.

Description

This quiz explores the differences between economic profit and accounting profit. It highlights how economic profit accounts for both explicit and implicit costs, while accounting profit considers only explicit costs. Test your understanding of profit calculations in various business contexts.