One of the important tasks in economics is the evaluation of alternatives to determine which best satisfies given objectives or goals. In order to do this it is often desirable determine cause and effect relationships and to quantify variables. Mathematics is a powerful tool that aids both these tasks. It is impossible to do economic analysis without some elementary understanding of basic math tools.
Mathematics is a very precise language that is useful in expressing causal relationships between related variables. Since microeconomics is the study of the relationships between resources and the production of goods that are used to satisfy wants, mathematics is indispensable. When decisions are made about the allocation of resources, it is desirable to be able to express how a change in one input will alter the output and ultimately change the utility of individuals.
Here is a list of some of the basic microeconomics formulas pertaining to revenues and costs of a firm.
Remember when you’re using these formulas there are a variety of assumptions, namely, that the the firm is profit-maximizing
Average Variable Cost (AVC) = Total Variable Cost / QAverage
Fixed Cost (AFC) = ATC – AVC
Total Cost (TC) = (AVC + AFC) X Output (Which is Q)
Total Variable Cost (TVC) = AVC X Output
Total Fixed Cost (TFC) = TC – TVC
Marginal Cost (MC) = Change in Total Costs / Change in Output
Marginal Product (MP) = Change in Total Product / Change in Variable Factor
Marginal Revenue (MR) = Change in Total Revenue / Change in Q
Average Product (AP) = TP / Variable Factor
Total Revenue (TR) = Price X Quantity
Average Revenue (AR) = TR / Output
Total Product (TP) = AP X Variable Factor
Economic Profit = TR – TC > 0
A Loss = TR – TC < 0
Break Even Point = AR = ATC
Profit Maximizing Condition = MR = MC
Explicit Costs = Payments to non-owners of the firm for the resources they supply.