Formulas
Average Variable Cost
(AVC)
Average Variable Cost = Variable Cost / Quantity
(AVC = VC / Q)
Total Cost
The sum of fixed and variable costs.
MR < MC
The firm should prduce less.
TR > TC
The firm earns an economic profit.
In a marginal product and average product graph, when MP is above AP (MP > AP), what is happening to the AP?
AP is rising.
Average Total Cost (Formula #1)
(ATC)
Average Total Cost = Total Cost / Quantity
(ATC = TC / Q)
Variable Cost
A cost that changes as output changes.
MR = MC
The firm maximizes profit.
TR = TC
The firm breaks even, earns a normal profit.
In a marginal product and average product graph, when MP is below AP (MP < AP), what is happening to the AP?
AP is falling.
Total Revenue
(TR)
Total Revenue = Quantity x Product
(TR = Q x P)
Fixed Cost
A cost that must be paid even when a firm’s output is zero; a cost that is the same at all output levels.
MR < MC
The firm should produce more.
TR < TC
The firm earns an economic loss.
In a marginal product and total product graph, when MP is is positive but decreasing, what is happening to the TP?
TP is increasing at a decreasing rate.
Marginal Revenue
(MR)
Marginal Revenue = Change in Total Revenue / Chang in Quantity
(MR = ΔTR / ΔQ)
Marginal Cost
The additional cost of producing one more unit of output.
Marginal Cost Definition
The additional cost of producing one more unit of output.
The Shut-Down Rule: TR<TC
In order to operate in the short-run, the firm's Total Revenue (TR) must cover its variable costs.
If TR < TC, the firm should shut down!
In a marginal product and total product graph, when MP is increasing, what is happening to the TP?
TP is increasing at an increasing rate.
Average Total Cost (Formula #2)
(ATC)
Average Total Cost = Average Variable Cost + Average Fixed Cost
(ATC = AVC + AFC)
Total Product
The total quantity of output produced by a certain amount of inputs.
Profit Maximization Rule
Firms are assured to maximum profits if they produce where MR is equal to MC (MR = MC).
Example: Fill in the Blank
Q = 40, P = $10, TR = $400, MR = $10, FC = $95, VC = $305, TC = $400, MC = $10, P / L = $0
Carl's rent increases by $65, which _____ fixed and total cost and _____ profit to a break-even level (TR = TC).
increases, decreases
In a marginal product and total product graph, when MP is zero, what is TP?
TP is at a maximum.