Reading notes--Principles of Economics (chapter 13)

Summary

Chapter 13 is the Cost of Production. This chapter introduces revenue, cost and profit.

Revenue

• Total revenue is the amount a firm receives for the sale of its output.
• Revenue = quantity * price

Cost

• Explicit cost is input cost that requires an outlay of money by the firm.
• Implicit cost is input cost that does not require an outlay of money by the firm.
• Fixed cost is cost that does not vary with the quantity of output produced.
• Variable costs is cost that varies with the quantity of output produced.

Profit

• Profit = Total revenue - Total cost
• Economic profit is total revenue minus total cost, including both explicit and implicit costs.
• Accounting profit is total revenue minus total explicit cost.
• Total opportunity cost is implicit cost pluses explicit cost.

Production function

• The relationship between the quantity of inputs used to make a good and the quantity of output of that good.

Diminishing marginal product

• The property whereby the marginal product of an input declines as the quantity of the input increases.

• Due to it, the production function gets flatter as the number of input increases.

• Due to it, the total-cost curve gets steeper as the quantity of output increases.

• Profit maximization

• Average total cost = marginal cost

Definitions

1. Total revenue– the amount a firm receives for the sale of its output

2. Total cost– the market value of the inputs a firm uses in production

TC = FC + VC

3. Profit– total revenue minus total cost

4. Explicit costs– input costs that require an outlay of money by the firm

5. Implicit costs– input costs that do not require an outlay of money by the firm

6. Economic profit– total revenue minus total cost, including both explicit and implicit costs

7. Accounting profit– total revenue minus total explicit cost

8. Production function– the relationship between the quantity of inputs used to make a good and the quantity of output of that good

9. Marginal product– the increase in output that arises from an additional unit of input

10. Diminishing marginal product– the property whereby the marginal product of an input declines as the quantity of the input increases

11. Fixed cost– costs that do not vary with the quantity of output produced

FC

12. Variable costs– costs that vary with the quantity of output produced

VC

13. Average total cost– total cost divided by the quantity of output

ATC = TC / Q

14. Average fixed cost– fixed cost divided by the quantity of output

AFC = FC / Q

15. Average variable cost– variable cost divided by the quantity of output

AVC = VC / Q

16. Marginal cost– the increase in total cost that arises from an extra unit of production

MC =

17. Efficient scale– the quantity of output that minimizes average total cost

18. Economies of scale– the property whereby long-run average total costs falls as the quantity of output increases

19. Diseconomies of scale– the property whereby long-run average total cost rises as the quantity of output increases

20. Constant returns to scale– the property whereby long-run average total cost stays the same as the quantity of output changes

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