11. Production Costs

Question 1

What is the economic/financial basis for decisions?

Answer 1

Costs
Returns

Question 2

Define: Cost of Production

Answer 2

The payments incurred to gather resources (inputs) and keep them from being used for other purposes
Aka economic costs

Question 3

Define: Returns/Profits

Answer 3

Revenue from sale of products

Question 4

Define: Gross Revenue

Answer 4

Total cash earnings

Question 5

Define: Net Revenue

Answer 5

Gross revenue minus costs of production

Question 6

Define: Enterprise Budgets

Answer 6

Used to evaluate costs and returns of a business enterprise
Used to manage for improved profit
Essential for determining where money is coming from and going to

Question 7

What are the (3) types of production costs?

Answer 7

Opportunity costs
Fixed costs
Variable costs

Question 8

Define: Opportunity Costs

Answer 8

Income that could have been earned by selling or renting the input to someone else
Additional income that would have been received if the input had been used in its most profitable alternative use

Question 9

What opportunity costs must we consider?

Answer 9

Management
Capital

Question 10

What is capital typically set to equal?

Answer 10

Interest rate on savings account
Current cost of borrowed capital

Question 11

What are examples of opportunity costs?

Answer 11

Capital investment
Labor used in the farm business
One hour of tractor time

Question 12

Define: Short Run

Answer 12

The available quantity of one or more production inputs is FIXED and cannot be changed (ex. corn production cycle)

Question 13

Define: Long Run

Answer 13

Period during which the quantity of all necessary productive inputs can be changed (selling dogs)

Question 14

When do fixed costs exist?

Answer 14

Only in the SHORT RUN

Question 15

Define: Fixed Costs

Answer 15

Overhead costs
Not under the control of the farm manager in the short tun
Incurred even if the input isn’t used
Do not change as a function of the quantity produced

Question 16

What are examples of fixed costs?

Answer 16

Depreciation
Interest
Taxes
Insurance
Building Repairs

Question 17

Define: Average Fixed Cost (AFC)

Answer 17

Expresses the fixed cost as an average cost per unit of output
Need an output measure (pounds, acres, cwt)

Question 18

What happens to AFC as output increases?

Answer 18

AFC declines as output increased

Question 19

Define: AFC

Answer 19

TFC/output

Question 20

Define: Variable Costs (VC)

Answer 20

Farm manager can control variable costs at any given point in time

Question 21

What happens to variable costs as production levels increase?

Answer 21

As production levels increase, variable costs increase

Question 22

When are variable costs present and what do they include?

Answer 22

Present in the short run and include all costs in the long run because fixed costs = 0

Question 23

What are some variable costs that become fixed during production cycle?

Answer 23

Fertilizer already applied, seed, feed, labor contracts, leases, machinery repairs, and maintenance

Question 24

Define: Total Variable Cost (TVC)

Answer 24

The sum of all variable costs

Question 25

What causes total variable cost to increase?

Answer 25

Increases as input use increased

Question 26

Define: Average Variable Cost (AVC)

Answer 26

Can be increasing, constant, or decreasing

Question 27

Define: Marginal Cost (MC)

Answer 27

Only the variable costs are changing, fixed costs stay the same regardless of the input/output level

Question 28

Define: Marginal Cost Mathematically

Answer 28

MC = Change in TC/ Change in Output
or MC = Change in TVC/Change in output