Chapter 13- Industrial organization: the study of how firms’ decisions about prices and quantities depend on the market conditions they face- Profit = Total revenue – Total costo Profit = amount received for sales – cost of products usedo Total revenue = quantity of output x price output is sold- Explicit costs vs. implicit costso Explicit costs: input costs that require an outlay of moneyo Implicit costs: does not require an outlay of money- Economist vs. accountanto Economist Studies explicit and implicit costs Views forgone interest income given up as a cost of the businesso Accountant Studies explicit costs only Does not view forgone interest income because no money flows out of the business to pay for it- Economic profit = total revenue – total cost (including explicit and implicit)- Accounting profit = total revenue – total explicit cost- Production function: 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 output- 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 vary with the quantity of output produced- Total cost = fixed costs + variable costs- Average total cost = total cost / the quantity of output- Average fixed cost = cost / quantity of output- Average variable cost = variable cost / quantity of output- Marginal cost: the increase in total cost that arises from an extra unit of production- Average total cost = total cost / quantityo ATC = TC / Qo Average total cost tells us the cost of a typical unit of output if total cost is divided evenly over all the units produced- Marginal cost = Change in total cost / Change in quantityo MC = TC / Qo Marginal cost tells us the increase in total cost that arises from producing an additional unit of output- Efficient scale: the quantity of output that minimizes average total cost- Average Total Cost in the Short and Long Runso Because fixed costs are variable in the long run, the average-total-cost curve in the short run differs from the average-total-cost curve in the long run.- 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
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