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Chapter 13

# chapters 13 and 14

7 Pages
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Department
Economics
Course Code
ECN 104
Professor
Eric Kam

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Chapter 13
Total Revenue, Total cost, Profit
A firms goal is to maximize profit

Cost: Explicit vs Implicit
oExplicit: require an outlay of money
Accounting profit is the difference of the total revenue and the total
explicit costs
oImplicit: do not require a cash outlay.
Economic profit is the difference of the total revenue and the total cost
(explicit and implicit)
PRODUCTION FUNCTION
Shows the relationship between the quantity of inputs used to produce a good and
the quantity of outputs of that good. (represented by a table, equation, or graph)
Marginal product of an input: is the increase in output arising from each additional
unit of that input (holding everything else constant)
   
Importance: for each additional input, it is up to the managers to decide if the rise of
outputs is beneficial
Diminishing marginal product: the marginal product of an input declines as the
quantity of the input increases (holding everything constant) MPL diminishes as
Labour rises whether the fixed input is land or capital (equipment, machines…)
Marginal Costs: What is the increase in Total cost from producing one more unit
COSTS
Fixed costs (FC) do not vary with the quantity of output produced; stays the same
(ex: land)
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oThese inputs affect the short run
Variable costs (VC) vary with the quantity produced (wages)
oThese inputs affect the long run
ATC is usually U-shaped because
o o Initially, falling AFC
pulls ATC down
oEventually, rising AVC
pulls ATC up
When MC < ATC ATC is falling
When MC > ATC ATC is rising
Firms efficient scale: MC curve
crosses the ATC curve at ATC
minimum
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Description
Chapter 13 Total Revenue, Total cost, Profit • A firms goal is to maximize profit • Cost: Explicit vs Implicit o Explicit: require an outlay of money Accounting profit is the difference of the total revenue and the total explicit costs o Implicit: do not require a cash outlay. Economic profit is the difference of the total revenue and the total cost (explicit and implicit) PRODUCTION FUNCTION • Shows the relationship between the quantity of inputs used to produce a good and the quantity of outputs of that good. (represented by a table, equation, or graph) • Marginal product of an input: is the increase in output arising from each additional unit of that input (holding everything else constant) • Importance: for each additional input, it is up to the managers to decide if the rise of outputs is beneficial • Diminishing marginal product: the marginal product of an input declines as the quantity of the input increases (holding everything constant) MPL diminishes as Labour rises whether the fixed input is land or capital (equipment, machines…) • Marginal Costs: What is the increase in Total cost from producing one more unit COSTS • Fixed costs (FC) do not vary with the quantity of output produced; stays the same (ex: land) www.notesolution.com o These inputs affect the short run • Variable costs (VC) vary with the quantity produced (wages) o These inputs affect the long run • ATC is usually U-shaped because o o Initially, falling AFC pulls ATC down o Eventually, rising AVC pulls ATC up When MC < ATC ATC is falling When MC > ATC ATC i
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