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Week 6:Elasticity and Its Applications - Coggle Diagram
Week 6:Elasticity and Its Applications
The Costs of Production
Costs are critically important to many business decisions, including production, pricing, and hiring.
Total Revenue (Price * Quantity)
The amount a firm receives for the sale of its output.
Total Cost (Total fixed cost +total variable cost)
The market value of the inputs a firm uses in production.
Profit is the firm’s total revenue minus its total cost.
Profit = TR – TC
Costs as opportunity costs
The cost of something is what you give up to get it
Firm’s cost of production
Include all the opportunity costs
Making its output of goods and services
Costs: Explicit vs. Implicit
Explicit costs
require an outlay of money
Implicit costs
do not require a cash outlay
Economic profit
Total revenue minus total cost
Including both explicit and implicit costs
Accounting profit
Total revenue minus total explicit cost
Economists measure a firm’s economic profit as total revenue minus total cost, including both explicit and implicit costs.
Accountants measure the accounting profit as the firm’s total revenue minus only the firm’s explicit costs.
PRODUCTION AND COSTS
Production Function
The production function shows the relationship between quantity of inputs used to make a good and the quantity of output of that good.
Diminishing Marginal Product
Diminishing marginal product is the property whereby the marginal product of an input declines as the quantity of the input increases.
Marginal Product
The marginal product of any input in the production process is the increase in output that arises from an additional unit of that input.
Diminishing Marginal Product
The slope of the production function measures the marginal product of an input, such as a worker.
When the marginal product declines, the production function becomes flatter.
The Various Measures of Cost
Fixed costs
Do not vary with the quantity of output produced
Variable costs
Vary with the quantity of output produced
Average fixed cost (AFC)
Fixed cost divided by the quantity of output
Average variable cost (AVC)
Variable cost divided by the quantity of output
Three Important Properties of Cost Curves
Marginal cost eventually rises with the quantity of output.
The average-total-cost curve is U-shaped.
The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost.
Costs in the Short Run & Long Run
Short run:
Some inputs are fixed (e.g., factories, land). The costs of these inputs are FC.
Long run:
All inputs are variable (e.g., firms can build more factories, or sell existing ones).
Economies of scale
refer to the property whereby long-run average total cost falls as the quantity of output increases.
Diseconomies of scale
refer to the property whereby long-run average total cost rises as the quantity of output increases.
Constant returns to scale
refers to the property whereby long-run average total cost stays the same as the quantity of output increases