Economic profit: total revenue less total direct and implicit costs. Zero economic profit is that total revenue equals the sum of direct and implicit costs. Positive economic profit is that total revenue exceeds the sum of direct and implicit costs.
Short run costs: As long as marginal cost (MC) is below average total cost (ATC) or average variable costs, then ATC and AVC , respectively, will fall when output is increased. When MC exceeds AVC or ATC, then AVC and ATC will rise as output expands. The ATC and AVC curves are generally U-shaped. Gains from specialization are overcome by diminishing returns, so the ATC, AVC, and MC curves are all U-shaped. Higher output levels spread a firm's overhead, so the AFC curve declines continuously.
Note that the MC curve intersects the AVC and ATC curves at their minimum values.
Try to work with the relationship between APPl, MPPl, AVC, and MC (MC= W/MPl, and AVC= W/APl).
For example, the relationship between short-run costs and production: By using the following table, calculate average product of labor (APl), marginal Product of labor(MPl), average variable cost(AVC), which is W/APl, and marginal cost (MC), which also is W/MPl and establish their relationship.
The reason for economic of scale: Specialization and division of labor, dimensional factor, and improved technology. .
The reason for diseconomies of scale is due to inefficient management such as supervisory, information costs increase, and the failure of controlling and coordinating business activities( production, marketing, finance, Transportation, --). So the cost of managing business activities increases faster than the output: Also specialization and division of labor, dimensional factor, and improved technology. .
The reason for diseconomies of scale is due to inefficient management such as supervisory, information costs increase, and the failure of controlling and coordinating business activities( production, marketing, finance, Transportation, --).
