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Key Economic Cost Definitions

This document defines key economic terms related to costs, revenues, and production. It defines total revenue as price multiplied by quantity and total cost as the market value of inputs used in production. Profit is calculated as total revenue minus total cost. Explicit costs require monetary outlays while implicit costs do not. Economic profit includes all costs while accounting profit only includes explicit costs. A production function shows the relationship between inputs and outputs, and marginal product is the change in output from an additional unit of input.

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217 views2 pages

Key Economic Cost Definitions

This document defines key economic terms related to costs, revenues, and production. It defines total revenue as price multiplied by quantity and total cost as the market value of inputs used in production. Profit is calculated as total revenue minus total cost. Explicit costs require monetary outlays while implicit costs do not. Economic profit includes all costs while accounting profit only includes explicit costs. A production function shows the relationship between inputs and outputs, and marginal product is the change in output from an additional unit of input.

Uploaded by

Konami Shin
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

201 - Chapter 13 Definitions

total revenue: the amount a firm receives for the sale of its output.
Total Revenue = Price  Quantity

total cost: the market value of the inputs a firm uses in production.
profit: total revenue minus total cost.
Profit = Total Revenue - Total Cost

explicit costs: input costs that require an outlay of money by the firm.
implicit costs: input costs that do not require an outlay of money by the firm.

economic profit: total revenue minus total cost, including both explicit and implicit
costs.
accounting profit: total revenue minus total explicit cost.

production function: the relationship between quantity of inputs used to make a good
and the quantity of output of that good.

marginal product: the increase in output that arises from an additional unit of input.

change in output
Marginal Product of Labour =
change in labour

diminishing marginal product: the property whereby the marginal product of an input
declines as the quantity of the input increases.

fixed costs: costs that do not vary with the quantity of output produced.
variable costs: costs that do vary with the quantity of output produced.
Total cost is equal to fixed cost plus variable cost.
TC = FC + VC

average total cost: total cost divided by the quantity of output.


average fixed cost: fixed costs divided by the quantity of output.
average variable cost: variable costs divided by the quantity of output.

TC VC FC
ATC = ; AVC = ; AFC =
Q Q Q
marginal cost: the increase in total cost that arises from an extra unit of production.

change in total cost


𝑀𝐶 =
change in quantity
efficient scale: the quantity of output that minimizes average total cost.

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201 - Chapter 13 Definitions

economies of scale: the property whereby long-run average total cost falls as the
quantity of output increases.
diseconomies of scale: the property whereby long-run average total cost rises as the
quantity of output increases.
constant returns to scale: the property whereby long-run average total cost stays the
same as the quantity of output changes.

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