Formulas
Total Cost
(TC)
Fixed Cost + Variable Cost = Total Cost
(FC + VC = TC)
Fixed Inputs
Inputs that cannot be changed in the short run to change production.
When total physical product is at its maximum, marginal physical product must be...
equal to zero.
What is an input that can be changed in the short run to change producton?
Variable Inputs
Explicit Costs
"Out of Pocket Expenses"
Money spent in materials, utilities, labor, rent, capital, etc.
Marginal Cost
(MC)
Marginal Cost = Change in Total Cost / Change in Quantity
MC = ΔTC / ΔQ
Variable Inputs
Inputs that can be changed in the short run to change production.
When MP exceeds AP, what must be true?
AP is increasing.
What is an input that cannot be changed in the short run to change production?
Fixed Inputs
Implicit Costs
"Income Forgone"
The money value at ones opportunity cost.
Average Fixed Cost
(AFC)
Average Fixed Cost = Fixed Cost / Quantity
(AFC = FC / Q)
Short Run
The period of time during which there are fixed inputs; the period of time too short for a firm to alter its plant capacity.
In Microeconomics, the short run is defined as which of the following?
A) A period that is less than one year.
B) A period that is between 1 and 4 years.
C) A period that is too short for a firm to be able to change its level of output.
D) A period during which some inputs in a firm's production process cannot be changed.
E) A period during which a firm's fixed costs exceed its variable costs.
D) A period during which some inputs in a firm's production process cannot be changed.
What is the period of time during which there are fixed inputs; the period of time too short for a firm to alter its plant capacity?
Short Run
Accounting Profit
Total Revenue = Price x Quantity
Total Cost = Fixed Cost + Variable Costs [explicit costs]
Accounting Profits = Total Revenue - Explicit Costs
Average Product
(AP)
(APL = TP / L)
Long Run
The period of time long enough for a firm to change all of its inputs; the period of time long enough for a firm to alter its plant capacity.
Suppose that a firm begins to hire workers for a newly completed plant with a fixed amount of machinery. As the firm hires additional workers, one would expect the marginal prosict to...
rise initially, but eventually fall.
What is the period of time long enough for a firm to change all of its imputs; time long enough to alter its plant capacity?
Long Run
Economic Profit
Total Revenue = Price x Quantity
Total Cost = Explicit + Implicit Costs
Economic Profit = Total Revenue - (Explicit + Implicit Costs)
Marginal Product
(MP)
Marginal Product of Labor = Change in Total Product / Change in Labor
(MPL = ΔTP / ΔL)
Plant Capacity
A firm’s maximum potential level of production.
Q = 40, P = $10, TR = $400, MR = $10, FC = $120, VC = $305, TC = $425, MC = $10, P / L = -$25
Carl's delivery contract increases by $25, which increases FC again. The firm is now earning a loss. Should they stay open or shut down? (TC > TR = Loss)
The firm will stay open, fixed costs must be paid in the short run!
Stay open: Loss is -$25
Shut down: Loss is -$120
What is a firm's maximum potential level of production?
Plant Capacity
Normal Profit
Occurs when a firm earns enough revenue to pay for both explicit and implicit costs (zero economic profit).