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Economics 202 ch 20

Principles of Economics ch 20

Opportunity Cost The value of the best alternative surrendered when a choice is made.
Explicit Cost Actual expenditure of money. Examples are utilities expense, rent expense, and tax expense.
Implicit Cost Cost without an expenditure of money. Example is the value of a business owner's labor devoted to the business.
Accounting Profit The difference between total revenue and explicit costs.
Accounting Profit = Total Revenue- Explicit Cost
Economic Profit The difference between total revenue and total opportunity cost, including both explicit and implicit costs.
Economic Profit = Total Revenue - Total Opportunity Costs (explicit and implicit)
Sunk Cost A past cost that cannot be changed by current decisions.
Short Run A period in which at least one input is fixed.
Inputs Resources
Long Run A period in which all inputs can be varied.
Marginal Physical Product (MPP) The change in output with one additional unit of input.
Law of Diminishing Marginal Returns As larger amounts of a variable input are combined with fixed inputs, eventually the marginal physical product of the variable input declines.
Marginal Costs (MC) The change in total cost that result from producing an additional unit of output.
Fixed Costs (FC) Costs that do not vary with output.
In short run production, at least one input is: Fixed in amount.
As short run production is increased: The amount of variable inputs used in production must be increased. Thus, the cost associated with inputs (variable costs) increase with output.
Variable Costs (VC) Cost that vary with output.
Total Cost (TC) The sum of fixed and variable cost.
Average Total Cost (ATC) = Total Cost / Quantity of Output
Average Fixed Cost (AFC) = Fixed Costs / Quantity of Output
Average Variable Cost (AVC) = Variable Costs / Quantity of Output
Average Fixed Cost + Average Variable Cost = Average Total Cost (ATC)
The sum of average fixed cost and average variable cost: Equals average total cost.
The marginal cost curve intersects the ATC curve and the AVC curve at: Their minimum points.
The average fixed cost decreases as: Additional units of output are produced. This is because fixed costs are being spread over an increasing amount of output.
Total Revenue (TR) Equals the selling price of the output multiplied by the quantity sold.
Marginal Revenue (MR) The change in total revenue from selling an additional unit of output.
Break-Even Quantity Occurs where total revenue and total cost are equal (where the TR curve and the TC curve intersect).
The profit-maximizing quantity occurs where: Marginal revenue and marginal costs are equal (where the MR curve and the MC curve intersect.
The first step to complete a cost table is to: Determine the fixed cost (FC).
The second step to complete a cost table is to: Determine the average fixed cost for the different quantities by using the formula AFC = FC / Q.
The third step to complete a cost table is to: Complete the table row by row.
Created by: dengler



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