Costs Fixed costs: costs of production that do not change with the level of output. Variable costs: costs of production that vary with the level of output. Total costs: total costs of producing a certain level of output. [ Fixed costs + Variable costs ] Average costs: average cost of production per unit. [ Total cost / Quantity produced ] Marginal costs: additional cost of producing an additional unit of output.
Short-run cost curve MC ATC Cost ($) AVC Lowest points Output Shape of curves are explained by the concept of diminishing returns.
Time Short Run: the period of time in which at least one factor of production is fixed – the production stage. Long Run: the period of time in which all factors of production are variable.
Laws Law of diminishing average returns: as extra units of a variable factor are applied to a fixed factor, the output per unit of the variable factor will eventually diminish. Law of diminishing marginal returns: as extra units of a variable factor are applied to a fixed factor, the output from each additional unit of the variable factor will eventually diminish.
Scales Economies of scale: any fall in long-run unit (average) costs that come about as a result of a firm increasing its scale of production (output). Diseconomies of scale: any increase in long-run unit (average) costs that come about as a result of a firm increasing its scale of production (output).N
Revenues Total revenue: the aggregate revenue gained by a firm from the sale of a particular quantity of output. [ Price x quantity sold ] Average revenue: total revenue received / number of units sold. Price usually = average revenue. Marginal revenue: the extra revenue gained from selling an additional unit of a good or service.
Profits Normal profits: the amount of revenue needed to cover the total costs of good or service. Abnormal profits: any level of profit that is greater than that required to ensure that a firm will continue to supply its existing good or service. (Amount of revenue > total costs of production)
Normal Profits in Perfect Competition Cost/Price ($) MC AC P/C D=AR 0 Output MR In normal profits, Price=Cost
Abnormal Profits Cost/Price ($) MC AC P C D=AR 0 Output MR
Output Profit-maximizing level of output: the level of output where marginal revenue = marginal cost. Shut-down price: price where average revenue is equal to average variable cost. Break-even price: price where average revenue is equal to average total cost. Below this price, the firm will shut down in the long run.