This document discusses key concepts related to the theory of the firm including costs, revenues, profits, and output decisions. It defines different types of costs like fixed, variable, average, and marginal costs. It also explains short-run and long-run periods and concepts like economies and diseconomies of scale. The document outlines how profits, revenues and costs determine a firm's optimal output level and whether it earns normal profits or abnormal profits.
Economic Costs refer to the sum of opportunity costs and accounting costs. It is the cost of choosing one economic activity over another. This means when we look at economic costs, it includes all the costs incurred to carry out a particular activity that have to be paid and the opportunity cost or the benefits from the next best alternative which had to be forgone in order to carry out this activity. Copy the link given below and paste it in new browser window to get more information on Economic Costs:- http://www.transtutors.com/homework-help/economics/economics-costs.aspx
Economic Costs refer to the sum of opportunity costs and accounting costs. It is the cost of choosing one economic activity over another. This means when we look at economic costs, it includes all the costs incurred to carry out a particular activity that have to be paid and the opportunity cost or the benefits from the next best alternative which had to be forgone in order to carry out this activity. Copy the link given below and paste it in new browser window to get more information on Economic Costs:- http://www.transtutors.com/homework-help/economics/economics-costs.aspx
-Introduction
-Cost Concepts
-Opportunity Cost and Actual Cost
-Business Cost and Full Cost
-Explicit Cost and Implicit Cost
-Out-of-pocket Cost and Book Cost
-Fixed Cost and Variable Cost
-Total Cost
-Average Cost
-Marginal Cost and Marginal Revenue
-Sunk Cost
-Introduction
-Cost Concepts
-Opportunity Cost and Actual Cost
-Business Cost and Full Cost
-Explicit Cost and Implicit Cost
-Out-of-pocket Cost and Book Cost
-Fixed Cost and Variable Cost
-Total Cost
-Average Cost
-Marginal Cost and Marginal Revenue
-Sunk Cost
2. 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.
3. Short-run cost curve MC ATC Cost ($) AVC Lowest points Output Shape of curves are explained by the concept of diminishing returns.
4. Time Short Run: the period of time in which at least one factor of production is fixed – the production stage. Long Run: the period of time in which all factors of production are variable.
5. Laws Law of diminishing average returns: as extra units of a variable factor are applied to a fixed factor, the output per unit of the variable factor will eventually diminish. Law of diminishing marginal returns: as extra units of a variable factor are applied to a fixed factor, the output from each additional unit of the variable factor will eventually diminish.
6. Scales Economies of scale: any fall in long-run unit (average) costs that come about as a result of a firm increasing its scale of production (output). Diseconomies of scale: any increase in long-run unit (average) costs that come about as a result of a firm increasing its scale of production (output).N
7. Revenues Total revenue: the aggregate revenue gained by a firm from the sale of a particular quantity of output. [ Price x quantity sold ] Average revenue: total revenue received / number of units sold. Price usually = average revenue. Marginal revenue: the extra revenue gained from selling an additional unit of a good or service.
8. Profits Normal profits: the amount of revenue needed to cover the total costs of good or service. Abnormal profits: any level of profit that is greater than that required to ensure that a firm will continue to supply its existing good or service. (Amount of revenue > total costs of production)
9. Normal Profits in Perfect Competition Cost/Price ($) MC AC P/C D=AR 0 Output MR In normal profits, Price=Cost
11. 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.