ECON201_Notes

# ECON201_Notes - o Productivity determines how much cost...

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Profit (assuming ordinary return = 12%) o A firm making 14% accounting profit is making both accounting and economic profits. o A firm making -2% accounting profit is making both economic and accounting losses. o A firm making 6% accounting profit is making accounting profits but economic losses. “Normal Profit” o Means a firm is making the same profit as would be available to it elsewhere in the economy. o Means the firm receives enough revenue to pay all explicit and implicit, but no more. o Is the accounting profit earned when all resources used by the firm earn their opportunity cost. o Is not a condition of hardship. o Is sometimes called “zero economic profit.” Costs that matter o The costs that matter are the costs caused by a decision. o A cost that cannot be recovered (“sunk cost”) is irrelevant to making economic decisions. Production Function of Dave’s Pizza o Refer to the graph in the textbook, know the general shape of it. o Diminishing marginal product. The next step: cost curves

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Unformatted text preview: o Productivity determines how much cost must be incurred to produce a good or service. o Production function shows how o More convenient to express in terms of cost curves Fixed vs. Variable costs o Fixed costs do not vary with output. o Variable costs do. Short run vs. Long run o The short run is a time period so short that at least one of a firms resources is fixed (usually plant) o In the long run, all resources can be varied. o If costs are present at zero output, we know were looking at the short run. Cost definitions o TC = TFC + TVC o AFC=TFC/Q o AVC=TVC/Q o ATC=TC/Q o MC= change in TC/Q Costs Relationships: example Q TC TFC AFC AVC ATC MC The numbers for MC are in the middle between the previous and latter rows, since its the marginal cost. 10--10 18 5 15 22 32 1 10 10 10 10 20 2 10 18 5 9 14 3 10 23 5 7.7 11 4 10 38 2.5 9.5 12 5 10 60 2 12 14 6 10 92 1.7 15.3 17...
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## This note was uploaded on 10/19/2010 for the course COB ECON201 taught by Professor Woods during the Fall '10 term at James Madison University.

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ECON201_Notes - o Productivity determines how much cost...

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