Production Function
What is the Production Function?
The way a firm combines inputs to produce an output.
Fixed Cost (FC), Variable Cost (VC), and Total Cost (TC)
What are different returns to scale?
Increasing Returns to Scale, Decreasing Returns to Scale, and Constant Returns to Scale.
Profit provides the incentive for firms to innovate, cut costs and uses society resources efficiently.
How can you determine profit?
As long as Total Revenue is greater than Total Cost, firms are earning a profit. It is also important to remember that rational firms use Marginal Analysis.
What are two types of inputs?
Variable Inputs and Fixed Inputs
How can you measure production costs?
Average Fixed Cost (AFC), Average Variable Cost (AVC), and Average Total Cost (ATC)
Define economies of scale.
Long-run ATC decreases as output increases.
Define explicit costs and give an example of an explicit cost.
Explicit costs usually go by "Out of Pocket expenses" It is money spent on material, utilities, labor, rent, capital, etc. For an example. A car company faces explicit costs such as metal, copper, rubber, leather and computer software as well as auto workers.
How can you maximize profit?
Firms will continue to produce as long as the marginal revenue. This marginal revenue is earned from an extra product that is greater than or equal to the marginal cost of that product.
What is the difference between Short Run and Long Run?
Short Run is the period during which there are fixed inputs, and Long Run is the period long enough for a firm to change all of its inputs.
If MC is below ATC and AVC then...
Both ATC and AVC are falling.
Define Diseconomies of Scale.
Long-run ATC increases as output increases.
Define Implicit Costs and give an example of Implicit Costs.
Implicit costs, also known as "income foregone" are the money value of one's opportunity cost. For example, a teacher opens a restaurant and the income they are giving up is by becoming a restaurant owner
What is the profit maximization rule?
MR=MC
What is Plant Capacity?
A firm's maximum potential level of production.
If MC is above ATC then..
ATC is rising...
Define Constant Returns to Scale
Long-Run ATC is constant as output increases.
What is accounting profit?
Accounting profit includes explicit costs only, which include typical fixed and variable costs.
If TR>TC, the firm..
How do you measure production?
AVC is rising
If a firm's long-run average total cost increases as output increases, the firm is experiencing?
Diseconomies of scale.
What is economic profit?
Economic profit includes both explicit costs and implicit costs, or one's foregone income.
If TR<TC, the firm..