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6 - Cost of Production Theory (Why ATC U-Shaped? (ATC consists of AFC and…
6 - Cost of Production Theory
Profit=Total Revenue - Total Cost
Total Revenue- the amt a firm receives from the sale of its output
Total Cost- the market value of the inputs a firm uses in production
Eco vs Acc.
Acc Profit=TR-Total Explicit Costs
Eco Profit=TR-TC (including explicit & implicit)
MC
the increase in TC from producing one more unit
MC= changes in TC / changes in Q
TC=FC+VC
FC do not vary with the quantity of output produced
VC vary with the quantity produced
ATC=TC/Q
ATC same meaning to
cost per unit
,
unit cost
ATC=AFC+AVC
Why ATC U-Shaped?
ATC consists of AFC and AVC
AVC is more dominant than AFC
ATC is downward sloping bcs AFC
ATC upward sloping bcs AVC. ATC rises later due to AVC- increasement of output, decrease in AFC
function can be make by ATC=AFC+AVC
Formula
AFC=FC/Q
AVC=VC/Q
ATC=TC/Q
SR & LR
SR- e.g factories, land
LR- e.g firms can builds more factories or sell existing ones