EC 110 Study Guide - Midterm Guide: Average Variable Cost, Marginal Revenue, Marginal Cost
27 Mar 2019
School
Department
Course
Professor
CH. 13 PRODUCTION AND COSTS
Def. and Concepts.
total revenue
the amount a firm receives for the sale of its output
total cost
the market value of the inputs a firm uses in production
profit
total revenue minus total cost
explicit costs
input costs that require an outlay of money by the firm
implicit costs
input costs that do not require an outlay of money by the firm
economic profit
total revenue minus total cost, including both explicit and implicit costs
accounting profit
total revenue minus total explicit cost
production function
the relationship between quantity of inputs used to make a good and the quantity of output of that good
marginal product
the increase in output that arises from an additional unit of input
diminishing marginal product
the property whereby the marginal product of an input declines as the quantity of the input increases
fixed costs
costs that do not vary with the quantity of output produced
variable costs
costs that vary with the quantity of output produced
average total cost
total cost divided by the quantity of output
average fixed cost
fixed cost divided by the quantity of output
average variable cost
variable cost divided by the quantity of output
marginal cost
the increase in total cost that arises from an extra unit of production
efficient scale
the quantity of output that minimizes average total cost
economies of scale
the property whereby long-run average total cost falls as the quantity of output increases
diseconomies of scale
the property whereby long-run average total cost rises as the quantity of output increases
constant returns to scale
the property whereby long-run average total cost stays the same as the quantity of output change
What are explicit costs and implicit costs?
explicit costs
input costs that require an outlay of money by the firm (wages, costs, accounting costs) wages a firm pays its workers
implicit costs
input costs that do not require an outlay of money by the firm: opportunity costs (forgone earnings) wages the firm owner gives up by working in
the firm rather than taking another job
Calculating accounting and economic profit.
accounting profit
total revenue minus total explicit cost (revenue - explicit costs)
economic profit
total revenue minus total cost, including both explicit and implicit costs (accounting profit - implicit costs)
What is a production function and what is marginal product?
production function
the relationship between quantity of inputs used to make a good and the quantity of output of that good
Marginal product
Output that results from one additional unit of a factor of production (such as a labor hour or machine hour), all other factors remaining
constant. Whereas the marginal cost indicates the added cost incurred in producing an additional unit of output, marginal product
indicates the added output accruing to an additional input. Since marginal product is measured in physical units produced, it is
also called marginal physical product.
Calculating marginal product of labor (MPL).
Total change in total product divided total change in variable input
What is diminishing MPL and why does it occur?
the property whereby the marginal product of an input decreases as the quantity of the input increases
The falling MPL is due to the law of diminishing marginal returns. The law states, āas units of one input are added (with all other
inputs held constant) a point will be reached where the resulting additions to output will begin to decrease; that is marginal
product will declineā The law of diminishing marginal returns applies regardless of whether the production function exhibits
increasing, decreasing or constant returns to scale. The key factor is that the variable input is being changed while all other factors
of production are being held constant. Under such circumstances diminishing marginal returns are inevitable at some level of
production.
Diminishing marginal returns differs from diminishing returns. Diminishing marginal returns means that the marginal product of
the variable input is falling. Diminishing returns occur when the marginal product of the variable input is negative. That is when a
unit increase in the variable input causes total product to fall. At the point that diminishing returns begin the MPL is zero
Calculate or determine FC, VC, TC, AFC, AVC, ATC and MC.
Addition, subtraction, division, multiplication of given.
Some of the firm's costs, called variable costs , change as the firm alters the quantity of output produced. Conrad's variable costs include
the cost of coffee beans, milk, sugar, and paper cups: The more cups of coffee Conrad makes, the more of these items he needs to buy.
Similarly, if Conrad has to hire more workers to make more cups of coffee, the salaries of these workers are variable costs. The fourth
column of the table shows Conrad's variable cost. The variable cost is 0 if he produces nothing, $0.30 if he produces 1 cup of coffee, $0.80 if
he produces 2 cups, and so on.
How they all appear on a graph.
x
Marginal cost eventually rises with the quantity of output.
x The average-total-cost curve is U-shaped.
x The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost.
Relationship between MC and ATC and the Efficient Scale.
It is important to understand the relationship between the ATC curve and the MC curve. When marginal cost is below the ATC
curve, the average total cost is falling. When the marginal cost is above the ATC curve (Figure 1), the average total cost is rising.
This means that the MC curve crosses the ATC curve at the minimum point on the ATC curve, indicating the firm's efficiency scale.
