Chapter 6 Flashcards
(26 cards)
It refers to the total payment by a firm to the owners of the factors of production.
Cost of Production
are forward looking costs, meaning economists are in tune with future costs because these costs have major repercussions on the potential profitability of the firm.
Economic Cost
It measures the price of the resources. It is the value of the foregone opportunity or alternatives benefits.
Opportunity Cost
t e n d t o b e retrospective; they recognize cost only when these are al ready made and
properly recorded.
Accounting Cost
Important Cost to Include:
A. Explicit and Implicit Cost
B. Short and Long Run Viewpoints
It is the actual expenditures made by the firm in purchasing or hiring the inputs it needs (that is usually thought of as its only expenses).
Explicit Cost (Visible Cost)
It is the cost of self-owned, self- employed resources frequently
overlooked in computing the
expenses of the firm.
Implicit Cost (Invisible Cost)
It is a time horizon when one input is held constant. To analyze the this, it is essential to fix the level of capital and study the changes in the quantity of labor hired.
Short Run Analysis
Important Cost to Include:
- Total Fixed Cost
- Total Variable Cost
- Total Cost
- Average Fixed Cost
- Average Variable Cost
- Average Total Cost
- Marginal Cost
is the kind of cost which remains constant regardless of the level or volume of production. The summation of
all the fixed costs incurred by firm in its production is the ________________.
Example for these cost are depreciation of building and machineries, salaries of top management, rent expenses on leased plant and interest payment on barrowed capital.
Total Fixed Cost
TFC = TC = TVC
is the kind of cost which changes in proportion to the level or volume of production.
_______________ is the totality of all the variable costs spent by the firm in its production.
Examples of these payment for raw materials, costs are
wages, tax payments and operating expenses (electricity,
fuel, and water)
Total Variable Cost
TVC = TC - TFC
It is the sum of total fixed cost and total variable cost.
Total Cost
TC = TFC + TVC
It refers to the fixed cost per unit at various levels of output. This is obtained by dividing
the TFC by the output (TP).
Average Fixed Cost
AFC = TFC / TP or TFC / Q
It is also called unit cost. This is obtained by dividing the TVC by the output (TP).
Average Variable Cost
AVC = TVC / TP or TVC / Q
It refers to the overall cost per unit of output. This can be obtained in two ways
Average Total Cost
ATC = TC / TP or TC / Q
or AFC + AVC
It is the additional or extra cost brought about by producing one additional unit of output.
Marginal Cost
MC = ▲TC / ▲Q
It is a time period wherein all fixed factor can be variable.
Long Cost Analysis
Profit Concept
- Total Revenue
- Marginal Revenue
It is the payment for the output produced by the firm. This represents the income of the firm. It is obtained by multiplying the price (P) and the output (Q) produced.
Total Revenue
TR = Price x Quantity (TP)
It is the additional income of a firm obtained by producing and selling one additional unit of product. It is also equivalent to the slope of TR.
Marginal Revenue
MR = ▲TR / ▲TP
The mathematical formula to derive profit (π) is by getting the difference between total revenue (TR) and total cost (TC).
Profit Maximization
π = TR - TC
A positive difference indicates ______(π >0); a negative difference means ______(π <
0); and when π = 0, it suggest __________
or TR is equal to TC.
Profit, Loss, Breakeven
is the point where the (positive) difference between the TR and TC is highest. This point corresponds to the equality of the slope of the TP (MR) and the
slope of TC (MC). Maximum profit: MR = MC
Profit Maximization
examines a firms’ output where the firm makes normal profit (zero profit). The benefits of using this analysis is in determining the lowest amount for a firm to avoid losses.
Break-even Analysis
