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Chapter 13: Costs of Production. The Supply and Demand . In Economy, Supply and Demand Basically runs all market activity. Supply and Demand is the most basic and the most important prefecture of Economy. Law of Supply.

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Chapter 13: Costs of Production


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    1. Chapter 13: Costs of Production

    2. The Supply and Demand • In Economy, Supply and Demand Basically runs all market activity. • Supply and Demand is the most basic and the most important prefecture of Economy

    3. Law of Supply • In the Law of Supply implies that a firm is willing to produce quantity of good, if the price is high enough • Causing Supply curve to go upwards.

    4. Revenue, Cost, and Profit • Firms always try to maximize their revenue, and profit. • Total Revenue: The amount received after selling the product. • Total Cost: How much it costs to create a single item. • Total Revenue – Total Cost = Profit

    5. Firm’s Profits • In the Firm’s Cost, there exists the Explicit Cost, and the Implicit Cost • Explicit Cost: Direct outlay of money • Implicit Cost: Cost not exactly requiring tangible money

    6. Economic Profit vs. Accounting Profit • Economist view profit with total revenue minus Explicit cost Minus Implicit Cost. • Accountants view profit with total revenue minus only the Explicit Cost • Therefore making the Economic Profit less than Accounting Profit

    7. The Production • In production, there are Key Terms to be realized. • Such as Marginal Product: any increase in the input process, for additional units • Diminishing Marginal Product: Rule which says, Marginal quantity decreases as Q of input increases

    8. Costs of Production • Fixed Costs: Costs that do not change with the amount of input or output used. • Variable Cost: Costs that change with the amount of item a firm produces. • Total Cost: • Total Cost = Total Fixed Cost + Total Variable Cost

    9. Cost of Production • Average Cost: Average cost is determined by the amount cost divided by the amount produced. • Average Total Cost = Average Fixed Cost + Average Variable Cost

    10. Marginal Cost • MC equals Amount of Cost, by the Amount of quantity

    11. ATC • ATC is U Shaped if graphed • ATC declines as output increases • ATC starts rising because variable cost rises

    12. ATC • At the Bottom of the ATC curve may result in minimizing ATC, which becomes the • EFFICIENT SCALE OF ECONOMY

    13. MC and ATC • Whenever MC is less than ATC, ATC is falling • Whenever MC is greater than ATC, the ATC is rising.

    14. Econmy and Diseconomist • Diseconomy of Scale: refer to the property whereby long-run average total cost rises as the quantity of output increases. • Constant Returns of Scale: The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost.