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Chapter 6.docx

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ECN 104
Frank Miller

Chapter 6 LAW OF DIMINISHING RETURNS: states that in all productive processes, adding more of one factor of production, while holding all others constant, will at some point yield lower per-unit returns. Economic Costs: A value equal to the quantity of other products that cannot be produced when resources are instead used to make a particular product. This can also me known as the OPPORTUNITY COST Explicit Cost: The monetary payments a firm must make to an outsider to obtain a resource. Implicit Cost: The monetary income a firm sacrifices whe nit uses a resource it owns rather than supplying the resource in the market; equals what the resource could have earned in the best-paying alternative employment. Accounting Profit = Sales – TOTAL Explicit Cost Economic Profit= Accounting Profit – TOTAL Implicit Cost Normal Profit is the cost of doing business. = Time, Effort and Income they gave up . ECONOMIC PROFIT < ACCOUNTING PROFIT Short RUN: The productive resources are fixed. Everything is fixed besides labour. Period is fixed. Fixed number of firms. Long RUN: Downsizing or upsizing, where plant sizes increases when everything Is variable. Number of firms is also considered to be variable. Amount of Labour Total Product Marginal Product of Labour 0 0 Increasing Return 1 10 10 2 25 15 3 45 20 Inflect Point 4 60 15 5 70 10 Diminishing Returns 6 65 -5 Fixed Cost: When a cost does not change by the output.; *Costs that in total do not change when the firm changes its output* Variable Cost: Costs that increase or decrease with a firms output. Total Cost= Fixed Cost + Variable Cost - To find Average of any variable Divide variable by Quantity. - Total Cost increase = decrease In marginal cost - Once the decreasing marginal cost starts increasing it never decreases again . Marginal Product: The change in total product divided by the change in total labour. - Marginal Product is the change In total product divided by the change In the quantity of labour. - Marginal product is zero when the slope of the total-product curve is zero - Average product rises when it is less than marginal pr
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