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Review_final_winter08

Review_final_winter08 - Summary of NEW material for final...

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Summary of NEW material for final exam (covered after midterm exam 2) Econ 1 – winter 2008 – Santa Clara University – Ifcher Covers chapters 13, 14, 15, 18, & 21 Firm behavior: the costs of production 1) Firm behavior - goal is to maximize profit a) Profit     : total revenue minus total cost. b) Total revenue     : the amount a firm receives for the sale of its output (P * Q). c) Total cost     : the market value of the inputs a firm uses in production. d) What are costs? i) Recall principle #2     : The cost of something is what you give up to get it. ii) Total opportunity costs include both implicit and explicit costs. (1) Explicit costs     : input costs that require an outlay of money by the firm. (2) Implicit costs     : input costs that do not require an outlay of money by the firm. iii) This is the major way in which accountants and economists differ in analyzing  the performance of a company.  Accountants focus on only explicit costs, while  economists examine both explicit and implicit costs. iv) Economic Versus Accounting Profit (1) Economic profit     : total revenue minus total cost, including both explicit and  implicit costs. (2) Accounting profit     : total revenue minus total explicit cost. (3) Know the example regarding Jane’s Espresso bar from class 2) Production function     : the relationship between quantity of inputs used to make a good  and the quantity of output of that good. a) Marginal product     : the increase in output that arises from an additional unit of input. b) Diminishing marginal product     : the property whereby the marginal product of an input  declines as the quantity of the input increases. 3) Fixed vs. variable costs a) Fixed costs     : costs that do not vary with the quantity of output produced. b) Variable costs     : costs that do vary with the quantity of output produced. c) Total cost:      equals fixed plus variable cost. i) The total cost curve gets steeper and steeper as output rises. Summary of  NEW  material for final exam (covered after midterm exam 2) Econ 1 – Santa Clara University – Ifcher Page 1 of 13
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ii) This increase in the slope of the total cost curve is due to diminishing marginal  product. 4) Average vs. marginal Costs a) Average total cost     : total cost divided by the quantity of output. b) Average fixed cost     : fixed costs divided by the quantity of output. c) Average variable cost     : variable costs divided by the quantity of output.
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