Microeconomics - Costs

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Lesson 6: Chapter 7

1.Define/discuss the following concepts (36 marks, 2 for each):

a.Total revenue
The total amount of income or reward that a firm received from the products and services sold to the market. (Total revenue = unit price x total no. of units)

b.Total cost
The total amount of the firm’s input which includes the explicit costs and implicit costs in order to produce a good or a service (output).

c.Profit
It is the difference between the total revenue received and the total costs of production of a firm selling a good or service to the market (Profit = total revenue – total costs). There are two types of profits: accounting profits and economics profits.

d.Explicit costs
The explicit costs are the hard cash or out of pocket expenses a firm paid for in order to produce their goods or services for the market. These costs are easily identified, like salary and wage, raw materials, utilities, advertising and transportation, etc., to name a few. They are opportunity costs.

e.Implicit costs
The implicit costs are opportunity costs that don’t require paying any physical dollar for the production of a good or service. These costs are unable to be recorded in the accounting books, such as the extra hours the entrepreneur works on his business without being paid, time and effort spent to maintain the business, etc.

f.Economic versus accounting profit
Most people take the total explicit costs they expense out of the total revenue they receive to come up the profit they make. We call it accounting profit, as it doesn’t take the implicit costs into account (Accounting Profit = Total Revenue – Explicit Costs).

From economists’ point of view, implicit costs should also be accounting for. It is because it is an opportunity cost that the business has to give up an opportunity for the one that they invest in. That is the economic profit [Economic Profit = Total Revenue – (Implicit Costs + Explicit Costs)].

g.Marginal product
The increase of the total product output is resulted from the single additional unit of variable input used. The additional marginal product brings the fixed inputs to its most effective function that results from increase of total output.

h.Diminishing marginal product
The marginal product of an input declines as the quantity of the input increases. If excess variable input is increased, the marginal product decreases, because it will impair the fixed inputs and causes the total output decreases – “Too many cooks spoil the soup”.

i.Fixed costs
The input cost does not change or stays the same with every level of output. Capital assets, buildings and office rent are some of the fixed costs of a company. The fixed costs curve is a horizontal line in the supply and demand graph.

j.Variable costs
The costs that are vary or change positively with the different quantity of output, but need not be in a constant pace. The variable costs include wages and raw materials, etc.

k.Average total cost
The average total cost (ATC) is the unit cost of a good or service produced or output. The total cost (TC) is the sum of all the variable and fixed costs that are used to produce a good or service. The ATC is computed as the total input costs divided by total number of output units. ATC = (total variable costs + total fixed costs) / total quantity

l.Average fixed cost
The fixed cost input for the production of one single unit of good or service. It is computed as the total fixed cost divided by the total quantity of output.
AFC = total fixed cost / total quantity

m.Average variable cost
The variable cost input for the production of one single unit of good or service. The outcome of the total variable cost divided by the total quantity of output equals the average variable cost (AVC).AVC = total variable cost / total quantity

n.Marginal cost
Marginal cost is also called additional cost. It is the total cost input for...
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