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THEORY OF PRODUCTION AND COST OF PRODUCTION - Coggle Diagram
THEORY OF PRODUCTION AND COST OF PRODUCTION
Costs and profits
Profits
Accounting profits
(TR = Total explicit cost)
Economic profits
(Total explicit cost + Total implicit cost)
Normal profits
Costs
Implicit
Non - moneytary
(e.g. the opportunity cost of the owner's time
Explicit
Moneytary
(e.g. paying wages to workes)
Short run & Long run
Short run
Some inputs are fixed
The costs of these inputs are FC
Long run
All inputs are variable
Production and costs
Production function
Shows the relationship between quantity of inputs used to make a good and the quantity of output of that good
Marginal product
Increase in output that arises from an additional unit of that input
Diminishing marginal product
Is the property whereby the marginal product of an input declines as the quantity of the input increase
The various measures of cost
Average variable cost (AVC)
Variable cost divided by the quantity of output
AVC = variable cost / quantity
Average Fixed Cost (AFC)
Fixed cost divided by the quantity of output
AFC = fixed cost / quantity
Fixed Cost
Do not vary with the quantity of output produced
Variable Cost
Vary with the quantity of output produced
Total Cost
TC = TFC + TVC
ATC = Total cost / quantity
Marginal Cost (MC)
Increase in total cost from producing one more unit
MC = change in total cost / change in quantity