11 Questions
What type of cost refers to monetary payments made by a firm for resources owned by others?
Explicit cost
What is the difference between Total Revenue and Total Explicit Cost?
Accounting profit
What type of cost represents the opportunity cost of resources already owned by the firm?
Implicit cost
What is the minimum return required by the owners of the firm to engage in a particular operation?
Normal profit
What type of profit is the additional return to the owners of the firm over and above the opportunity cost of their own inputs?
Economic profit
What is the term for the profit that forms part of the firm's costs of production?
Normal profit
What is the term for the profit calculated by subtracting Total Explicit Cost from Total Revenue?
Accounting profit
What type of profit is the difference between Total Revenue and Total Explicit Cost?
Accounting profit
What is the opportunity cost of resources already owned by the firm?
Implicit cost
What is the minimum return required by the owners of the firm to engage in a particular operation?
Normal profit
What type of profit is the additional return to the owners of the firm over and above the opportunity cost of their own inputs?
Economic profit
Study Notes
Types of Costs
- There are three main types of costs: Total Costs (TFC/TVC/TC), Average Costs (AFC/AVC/ATC), and Marginal Cost (MC)
Total Costs
- Total Costs (TC) = Total Fixed Costs (TFC) + Total Variable Costs (TVC)
Average Costs
- Average Total Costs (ATC) = Total Costs (TC) / Quantity Produced
- Average Variable Costs (AVC) = Total Variable Costs (TVC) / Quantity Produced
- Average Fixed Costs (AFC) = Total Fixed Costs (TFC) / Quantity Produced
Marginal Cost
- Marginal Cost (MC) = Change in Total Cost / Change in Output
- MC is the increase in total cost associated with a one-unit increase in production
Long-Run Average Total Cost (LRATC)
- In the long run, all inputs are variable, and there are no fixed inputs
- Law of diminishing returns does not apply in the long run
- Economies of scale occur when more units of a good or service can be produced on a larger scale with fewer input costs
- Constant returns to scale occur when increasing the number of inputs leads to an equivalent increase in output
- Diseconomies of scale occur when long-run average costs start to rise with increased output
Short-Run Production
- Short run: period in which at least one of the inputs is fixed
- Assumptions: the firm produces only one product, homogeneous, infinitely divisible amounts, production function, prices given, fixed inputs, and one variable input
Short-Run Costs
- Total Costs (TC) = Total Fixed Costs (TFC) + Total Variable Costs (TVC)
- Average Total Costs (ATC) = Total Costs (TC) / Quantity Produced
- Average Variable Costs (AVC) = Total Variable Costs (TVC) / Quantity Produced
- Average Fixed Costs (AFC) = Total Fixed Costs (TFC) / Quantity Produced
- Marginal Cost (MC) = Change in Total Cost / Change in Output
Profit, Revenue, and Cost
- Profit = Total Revenue - (Total Explicit Cost + Total Implicit Cost)
- Normal Profit: the minimum return required by the owners of the firm to engage in a particular operation
- Accounting Profit (Total Profit) = Total Revenue - Total Explicit Cost
- Economic Profit = Accounting Profit - Normal Profit
Learn about the distinction between fixed and variable costs, and how to calculate marginal costs in the short run. Understand the production schedule and its components.
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