Business Firm Marginal Cost

entity that employs factors of the change in total cost that results
production to produce goods and from a change in output
services to be sold to consumers, other
firms, or the government. Total and Variable Costs
C(Q): Minimum total cost of producing
Profit
alternative levels of output:
difference between total revenue and
TC(Q) = VC + FC
total cost.
Profit = TR - TC Total and Variable Costs
Explicit Cost C(Q): Minimum total cost of producing
a cost incurred when an actual payment alternative levels of output:
is made. TC(Q) = VC + FC
Implicit Cost
Production and Cost Theory

a cost that represent the value of

resources used in production for no
actual payment is made.
Accounting Profit
difference between total revenue and
explicit cost. AP = TR – TC
Economic Profit Economies of Scale
difference between total revenue and average cost falls as output increases.
total cost including both explicit cost Diseconomies of Scale
and implicit. EP = TR – TC (explicit & average cost rises as output increases.
Implicit cost)
Normal Profit
ZERO economic profit. A firm that earns
normal profit is revenue equal to its
total cost (explicit + implicit cost).
This is the level of profit necessary to
keep resources employed in the firm.
Short Run
a period of time in which some inputs in
the production process are fixed.
Long Run
a period of time in which all inputs in
the production process can be varied.
Sunk Cost
cost that is lost forever Cost functions are the foundation for
Marginal Product (MP) helping to determine profit-maximizing
change in output that results from behavior
changing the variable input by one unit,
holding all other inputs fixed.
Law of Diminishing Marginal Returns
as ever larger amounts of a variable
input are combined with fixed inputs,
eventually the marginal product of the
variable input will decline.
 Isoquants
a set of input bundles that all result in
the same level of output (given the
current technological constraint).
Isocost
a set of input bundles that all cost the
same(given current input price)
Linear Isoquants
capital and labor are perfect
substitutes
Leontief Isoquants
capital and labor are perfect
complements.
Production and Cost Theory

Cobb-Douglas Isoquants
inputs are not perfectly substitutable.
Marginal Rate of Technical Substitution
(MRTS)
the rate at which two inputs are
substituted while maintaining the same
output level.