Studied by 12 peopleProfit Formula
Total Revenue - Total Cost
Total Opportunity Cost Formula
Total explicit cost+ total implicit cost
What does it mean if your total revenue is higher than the sum of your implicit and explicit costs?
Operating your business is better than another activity.
What does it mean if your total revenue is lower than the sum of your implicit and explicit costs?
Another activity aside from your business is better for your time and resources.
What is the optimal output rule?
Profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost.
What is the principle of marginal analysis?
Every activity should continue until marginal benefit equals marginal cost.
Marginal Revenue Formula
Change in total revenue/change in qty of output
What is the optimal output rule?
Profit is maximized by producing the qty of output at which the marginal revenue of the last unit produced is equal to its marginal cost.
Grpah showing marginal revenue curve, marginal cost curve, and optimal output.
What is the production function?
The relationship between the qty of outputs a firm uses and the qty of output it produces
What is the relationship between quantity and the long run?
All inputs can be varied
What is the relationship between quantity and the short run?
At least one input is fixed
Total Product Curve
Marginal Product of Labor Formula
Change in qty/change in labor
Marginal product of labor graph
Total Cost Curve
Marginal Cost Formula
Change in total cost/ Change in qty of output
Marginal Cost Curve
Average Cost formula
total cost/qty of output
Average Total Cost Curve
Average Fixed Cost Formula
Fixed cost/ qty of output
Average variable cost formula
Variable cost/ qty of output
What is the spreading effect
The larger the output, the greater the qty of output over which fixed cost is spread, leading to a lower average fixed cost.
What is the diminishing returns effect?
The larger the output, the greater the amount of variable input required to produce additional units, leading to a higher average variable cost.
Graph with mcc, atc, avc, afc
What is the minimum cost output
The qty of output at which avg total cost is lowest, it corresponds to the bottom of the U shaped average total cost curve.
What are the three general principles that are always true about a firm’s marginal cost and average total cost curves?
At the minimum cost, average total cost is equal to marginal cost
At output less than the minimum cost of output, marginal cost is less than average total cost and average total cost is falling
At output greater than the minimum cost of output, marginal cost is greater than atc, and atc is rising
What is the actual curvature of the mcc?
It curves downward as a firm increases its production from zero up to some low level, sloping upward only at higher levels of production.
What is the actual curvature of the atc?
It is U shaped, mcc goes through the min point of atc
What is the actual curvature of the avc?
It’s U shaped
What is the actual curvature of the average fixed cost curve?
Backwards exponential
Average fixed cost curve
When do low fixed costs yield lower average total cost?
At low output levels
When do high fixed costs yield higher average total cost?
At high output levels
Graph that shows lratc, economies and diseconomies of scale
What determines the shape of the lratc?
Returns to scale
Note
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