1) Fixed costs remain constant regardless of output while variable costs change with output. Total cost is the sum of fixed and variable costs. 2) There are three laws of returns: increasing, constant, and diminishing which describe how output changes with additional inputs. 3) Normal profit occurs when total revenue equals total cost while abnormal profit exists when revenue exceeds costs.

1. Economics DefinitionsTheory of the FirmIB HL EconomicsWill Congleton

2. Fixed CostsFixed costs are costs of production that do not change based on output. They remain constant despite the number of products produced.e.g. Building cost, LandIB HL EconomicsWill Congleton

3. Fixed Cost GraphCostFcQuantityIB HL EconomicsWill Congleton

4. Variable CostsVariable costs are costs of production that change based on output. They differentiate as the number of products produced changes.e.g. Labor, Materials, ProductionIB HL EconomicsWill Congleton

5. Variable Cost GraphVcCostFcQuantityIB HL EconomicsWill Congleton

6. Laws of ReturnThe laws of return dictate how much return is created based on output. The laws of return can be observed along the variable cost curve.IB HL EconomicsWill Congleton

7. Law of Increasing ReturnThe law of increasing return states that for the first few factors of variable cost added, the increase in output will be greater than the increase in cost.VcCostIncreasing ReturnQuantityIB HL EconomicsWill Congleton

8. Law of Constant ReturnThe law of constant return states that for the following factors of variable cost added, the increase in output will be equal to the increase in cost.VcCostConstant ReturnQuantityIB HL EconomicsWill Congleton

9. Law of Diminishing ReturnThe law of diminishing return states that for the final factors of variable cost added, the increase in output will be less than the increase in cost.VcDiminishing ReturnCostQuantityIB HL EconomicsWill Congleton

10. Total CostThe Total Cost is the combination of all factors of cost, namely variable and fixed costs. Represented as an equation, total cost is equal to the sum of the variable and fixed cost.IB HL EconomicsWill Congleton

11. Total Cost GraphTcVcCostFcQuantityIB HL EconomicsWill Congleton

12. Total RevenueTheTotal Revenue is the revenue generated from the sale of any number of products. As an equation, it is represented as price multiplied by the quantity sold.IB HL EconomicsWill Congleton

13. Average RevenueThe Average Revenue is the revenue received as an average for each product sold. That is, it is the total revenue divided by the quantity produced. On a graph, average revenue is assumed to be equal to the demand for a productIB HL EconomicsWill Congleton

14. Average Revenue GraphCostAr = DQuantityIB HL EconomicsWill Congleton

15. Marginal RevenueTheMarginal Revenue is the revenue gained by selling an additional unit of a good or service. Graphically, is it generally assumed to be equivalent to half of the Ar value, though this relationship is not always true.IB HL EconomicsWill Congleton

16. Marginal Revenue GraphCostAr = DQuantityIB HL EconomicsWill CongletonMr

17. Average CostThe Average Cost is the average cost of production per unit. Represented as an equation, the average cost is the total cost divided by the quantity produced. Graphically the average cost is usually curved, representing the idea of diminishing return.IB HL EconomicsWill Congleton

18. Average Cost GraphCostAcAr = DQuantityIB HL EconomicsWill CongletonMr

19. Marginal CostTheMarginal Cost is the additional cost of producing an additional unit of output. As an equation, it can be represented as half of the average cost, though more often than not it deviates from this qualification. IB HL EconomicsWill Congleton

20. Marginal Cost GraphMcCostAcAr = DQuantityIB HL EconomicsWill CongletonMr

21. Normal ProfitNormal Profit is when the revenue generated is equal to the cost of production. Graphically, this means that Q1 falls at a point on which Ar and Ac overlap, or are equal.IB HL EconomicsWill Congleton

22. Normal Profit GraphMcCostAcP1Ar = DQuantityIB HL EconomicsWill CongletonMrQ1

23. Abnormal ProfitAbnormal Profit is when the revenue generated is greater than the cost of production. Graphically, this means that Q1 falls at a point on which Ar is above, or greater than Ac. The area above the Ac point to the Ar intercept is equal to the profit generated by sales.IB HL EconomicsWill Congleton

24. Normal Profit GraphMcCostAcP1ProfitAr = DQuantityIB HL EconomicsWill CongletonMrQ1

25. Short Run Average Cost (SRAC)The Short Run Average Cost in the average cost as it changes based around changes in increase (or decrease) in production from a change in factors of production.IB HL EconomicsWill Congleton

26. Short Run Average CostSRAC5SRAC1SRAC2SRAC4SRAC3

27. Long Run Average Cost (LRAC)The Long Run Average Cost in the average cost as all factors of production become variable, or subjected to change.IB HL EconomicsWill Congleton

28. Long Run Average CostSRAC5SRAC1LRAC1SRAC2SRAC4SRAC3

29. Economies of ScaleEconomies of Scale are any fall in long-run unit (average) cost that comes as the result of a firms change in production scale. Economies of scale can be shown on a short and long run graph.IB HL EconomicsWill Congleton

30. Economies of ScaleSRAC5SRAC1LRAC1SRAC2SRAC4SRAC3Economies of Scale

31. Diseconomies of ScaleDiseconomies of Scale are any an increase in long-run unit (average) cost that comes as the result of a firms change in production scale. Economies of scale can be shown on a short and long run graph.IB HL EconomicsWill Congleton

32. Diseconomies of ScaleSRAC5SRAC1LRAC1SRAC2SRAC4SRAC3Diseconomies of ScaleEconomies of Scale