Unit 5 - The Costs of Production Key words Total revenue o The amount a firm receives for the sale of its output Total cost o The market value of the

Unit 5 - The Costs of Production Key words Total revenue o...

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The Costs of Production11/02/2014°Key wordsTotal revenueoThe amount a firm receives for the sale of its outputTotal costoThe market value of the inputs a firm uses in productionProfitoTotal revenue minus total costExplicit costsoInput costs that require an outlay of money by the firmImplicit costsoInput costs that do not require an outlay of money by the firmEconomic profitoTotal revenue minus total cost, including both explicit and implicit costsAccounting profitoTotal revenue minus total explicit costProduction functionoThe relationship between quantity of inputs used to make a good and the quantity of output of that goodMarginal productoThe increase in output that arises from an additional unit of outputDiminishing marginal product
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oThe property whereby the marginal product of an input declines as the quantity of the input increasesFixed costsoCosts hat do not vary with the quantity of output producedVariable costsoCosts that vary with the quantity of output producedAverage total costoTotal cost divided by the quantity of outputAverage fixed costoFixed cost divided by the quantity of outputAverage variable costoVariable cost divided by the quantity of outputMarginal costoThe increase in total cost that arises from an extra unit of productionEfficient scaleoThe quantity of output that minimizes average total costoWhenever marginal cost is less than average total cost, average total cost is fallingoWhenever marginal cost is greater than average total cost, average total cost is risingoThe marginal-cost curve crosses the average total cost curve at its minimumEconomies of scaleoThe property whereby long-run average total cost falls as the quantity of output increasesDiseconomies
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oThe property whereby long-run average total costs rises as the quantity of output increasesConstant returns to scaleoThe property whereby long-run average total costs stays the same as the quantity of output changesSummaryThe goal of firms is to maximize profit, which equals total revenue minus total costWhen analyzing a firms behavior, it is important to include all the opportunity costs of production. Some of the opportunity costs, such as wages a firm pays its workers, are explicit. Other opportunity costs, such as the wages the firm owner gives up by working in the firm rather than taking another job are implicit. Economic profit takes both explicit and implicit costs into account, whereas accounting profits considers only explicit costs.A firms costs reflect its production process. A typical firms production function gets flatter as the quantity of an input increases, displaying the property of diminishing marginal product.
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