Implicit Costs

Input costs that don’t 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

53.Explain the various measures of cost. Give the meaning of average total cost and marginal cost and explain how they are related.

Fixed Costs

Don’t vary with the quantity of output produced

Fixed and variable costs are categories that occupy a more important place in the financial and accounting worlds. Fixed costs are all production costs that are flat, meaning that they do not change based on the number of units produced. Licensing fees and rental fees, for example, are fixed costs. While utility costs may change slightly depending on production levels, they often are considered fixed costs, too.

Variable Costs

Vary with the quantity of output produced

Variable costs are all costs that a company pays for production that change based on the production level. This includes labor, raw materials and equipment wear. Variable costs may change slightly with economies of scale, but businesses tend to average them out to a cost per product unit in order to conduct careful financial management.

Average fixed cost

-Fixed cost divided by the quantity of output

Average variable cost

-variable cost divided by the quantity of output

Average total cost(ATC)

-total cost divided by the quantity of output

-average total cost=total cost/quantity

ATC=TC/Q

Marginal cost(MC)

-increse in total cost(from producing an additional unit of output)

*arising in total cost

-marginal cost=change in total cost/change in quantity

MC=▲TC/▲Q

Marginal cost and average variable cost generally hold an inverted relationship. As the marginal cost increases, the average variable cost will decrease. On the other hand, as the marginal cost decreases, the average variable cost will increase. An alternative situation can occur when all of the costs are fixed. In this case, average variable costs and marginal costs will retain a constant relationship. You can represent this relationship between marginal cost and average variable cost on a graph using curves similar to that of the supply and demand curves.

54 Describe the relationship between short-run and long-run costs

Many decisions

-fixed in the short run

Variable in the long run

-Firms greater flexibility in the long run

-long run cost curves

*differ from short-run curves

*much flatter than short run cost curves

-short run cost curves

*lie on or above the long run cost curve

Economies of scale

Long run average total cost falls as the quantity of output increases

-increasing specialization

Constant returns to scale

-long run average total cost stays same as the quantity of output changes

Diseconomies of scale

-long run average total cost rises as the quantity of output increases

-increasing coordination problems

55. Explain how competitive firms decide when to shut down production temporarily and how competitive firms decide whether to exit and enter a market?

Shut down refers to a short-run decision not to produce anything during specific of a time because of current market conditions .Exit refers to a long-run decision to leave market

The firm shut down if a revenue that it would get from producing a less than its variable costs of production

If the price falls below average variable cost the firm is better off shut down.

The firm exit the market if the revenue it would get from producing is less than its total costs.

If the price fall below average total cost the firm is better off existing the market