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chapter 5 : the costs of production (diseconomies of scale happen when a…
chapter 5 : the costs of production
total revenue (TR = P X Q)
amount of firms receives for the sale
total cost
market values of input a firm use in production
profit ( total revenue - total cost)
firm's total revenue minus total cost
cost as opportunity costs
cost of something is what u give up to get it
firm's cost of production
include all opportunity costs
explicit costs
outlay of money (paying workers)
implicit costs
do not require cash outlay
economic profit
total revenue minus total cost
include explicit and implicit costs
accounting profit
total revenue minus total explicit cost
production Function
relationship btw quantity of inputs use to make good and quantity of output
of that good
marginal product
input in production to increase output that arises from additional unit of that input
diseconomies of scale
happen when a company grows so large of the costs per unit increase
increase marginal costs when output increase
three reasons of diseconomies
lowering operational efficiency
higher level of operational waste
mismatch of optimum level of output and different operations
diagram of diseconomies scale
diminishing Marginal Product
property of marginal product of input declines as the quantity of input increases
diagram of diminishing marginal product
Production Function to Total-Cost Curve
relationship btw quantity of firm that can produce and costs determine pricing
total-cost curve shows this relationship
diagram of Hungry Helen's Total-Cost Curve
variables measures of cost
fixed costs (FC)
do not vary with the quantity of output
variable costs (VC)
vary with quantity of output
average fixed cost (AFC)
fixed cost divided by quantity of output
average variable cost (AVC)
variable cost divided by quantity of output
TC = TFC + TVC
marginal cost (MC)
TC divided by Q
TVC divided by Q
why MC is important
if MC is less than revenue, profit rise if produce more
diagram Big Bob's cost curves
three important properties of cost curves
diagram Thirsty's Thelma's Average-Cost and Marginal-Cost curves
diagram average total cost in the short and long run
economies of scale
property whereby long-run average total cost falls the quantity of output increases
diseconomies of scale
property whereby long-run average total cost rises as the quantity output increses
constant returns to scale
property whereby long-run average total cost stays the same as quantity of output increases
diagram average total cost in short and long run (ii)
diagram LRATC with 3 factory sizes
costs in the short run & long run
in short run, there have fixed and variable costs
in long run, onli have variable costs
Efficient long run costs are sustained when the combination of outputs that a firm produces results in the desired quantity of the goods at the lowest possible cost
The short run costs increase or decrease based on variable cost as well as the rate of production. If a firm manages its short run costs well over time, it will be more likely to succeed in reaching the desired long run costs and goals
short run
some inputs are fixed
costs of these inputs are FC
long run
all input are variable
how ATC changes as the scale of production changes
economies of scale
increasing production allows greate specialization (workers work more focusing)
diseconomies of scale
due to coordination problems in large organizations