10 Questions
What is the difference between explicit and implicit costs?
Explicit costs are monetary payments and implicit costs are opportunity costs
What is the formula for accounting profit?
Total Revenue - Total Explicit Cost
What is normal profit?
The minimum return required by the owners of the firm
What is economic profit?
The additional return to the owners of the firm over and above the opportunity cost of their own inputs
What is the difference between short-run and long-run cost curves?
Short-run cost curves show the cost of production in the short period, while long-run cost curves show the cost of production in the long period
What is an example of an implicit cost?
The opportunity cost of using land already owned by the firm
What is an example of an explicit cost?
The cost of labour hired by the firm
What is the principal-agent problem?
A problem that arises when the owners of a firm have different goals from the managers of the firm
What is the difference between total revenue and marginal revenue?
Total revenue is the total amount of money earned by the firm, while marginal revenue is the additional revenue earned by the firm
What are the different types of firms?
Individual trader, partnership, companies, close corporations, and cooperatives
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
Understanding fixed and variable costs in production, including marginal costs and how they change with output.
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