Eco10.19 - •Fixed costs do not vary with the quantity of output produced •Variable costs are those that do vary with the quantity of output

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•Implicit and explicit Costs •A firm’s cost of production includes explicit costs and implicit costs Economic profit-total revenue minus total cost, including both explicit and implicit costs Accounting profit-firm’s total revenue minus only firm’s explicit costs Production Function-shows the relationship between quantity of inputs used to make a good and quanity of output of that good, short fun As Input increase, output increases…diminishes at higher scale, short fun phenomenon “too many cooks spoil the broth” Marginal profuct-any input in the production process is the increase in output that arises from an additional unit of that input MP labor = DELTA output/ DELTA input (labor) The slope of the production f(n) measures the marginal produce of an input, such as a worker. When the marginal product declines, the production f(n) becomes flatter. The total-cost curve shows the relationship between the quantity a firm can produce and its costs graphically. Costs of production may be divided into fixed costs and variable costs
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Unformatted text preview: •Fixed costs do not vary with the quantity of output produced •Variable costs are those that do vary with the quantity of output produced TC=FC+VC Average Costs Is the cost of each typical unit of produce •Average fixed costs (AFC)=FC/Q •Averaged Variable Costs (AVC)=VC/Q •Averaged Total Costs (ATC)=TC/Q TC/Q=FC/Q+VC/Q Marginal Cost (MC) measures the increase in total cost that arises from an extra unit of production. •Marginal cost helps answer “How much does it cost to produce an additional unit of output?” MC = change in total cost/change in quantity MC rises with the amount of output produced Reflects property of diminishing marginal product ATC crosses MC at the efficient scale For many firms the division of total costs between fixed and variable costs depends on the time horizon being considered. In the short run, some costs are fixed. In the long run all fixed costs become variable....
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This note was uploaded on 04/20/2008 for the course ECON 304K taught by Professor Ledyard during the Spring '08 term at University of Texas at Austin.

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