## How to Calculate Average Fixed Cost

Average fixed cost (i.e., AFC) is defined as the sum of all fixed costs of production divided by the quantity of output. That means AFC describes the share of all fixed costs that can be attributed to each unit. This is important for firms when it comes to production decisions […]

## How to Calculate Average Total Cost

Average total cost (i.e. ATC) is defined as the sum of all production costs divided by the quantity of output produced. That is, it measures how much a firm has to spend on each unit of output it produces. This concept is extremely important to understand how firms set prices and […]

## The Limits of Homo Oeconomicus

In economics, we often assume that people act like what we call a Homo Oeconomicus. That means they are always rational. More specifically, a Homo Oeconomicus always maximizes utility (as a consumer) or profits (as a producer). To do this, they rationally weigh all the costs and benefits and always chose […]

## How to Calculate Price Elasticities Using the Midpoint Formula

Price elasticity of demand is a measure that shows how much quantity demanded changes in response to a change in price.  It is calculated as the percentage change in quantity demanded divided by the percentage change in price (see also Elasticitiy of Demand). However, as you will notice sooner or […]

## How to Draw a Production Possibility Frontier

The production possibility frontier (PPF) is a graph that shows all maximum combinations of output that an economy can achieve, when available factors of production are used effectively. It is also known as the transformation curve or the production possibility curve. The PPF is a great concept because it beautifully […]

## How to Calculate Economic Profit

Economic profit is defined as the difference between total revenue and total cost, including both explicit and implicit cost. The inclusion of implicit cost is what separates economic profit from the more common accounting profit (which only accounts for explicit cost). Even though the latter is more commonly used in […]

## How to Calculate Marginal Revenue

Marginal revenue is defined as the revenue gained by producing one more unit of a product or service. Therefore, it is sometimes also referred to as the revenue of the last unit. In economics, the concept of marginal revenue is very important because it helps firms to make efficient production […]

## How to Calculate Marginal Cost

Marginal cost is defined as the cost incurred by producing one more unit of a product or service. Therefore, it is sometimes also referred to as the cost of the last unit. The concept of marginal cost is extremely important in economic theory because it is one of the foundations […]