2_Key Measures and Relationships Flashcards
Study MBA511 Module 1 - Fundamentals
___ is a cost paid in money, including labor, raw materials or other out-of-pocket expenses.
Explicit costs
___ is an opportunity cost incurred by a firm when it uses a factor of production for which it does not make a direct monetary payment.
Implicit costs
What are the two types of cost in ECON?
Explicit and implicit costs
What are the two types of implicit costs?
Depreciation and normal costs
___ is an opportunity cost of a firm using capital that it owns; measured in the market value of capital over a given period of time.
Depreciation costs
___ is the return to entrepreneurship; the cost of the entrepreneur not running another firm.
Normal profit
___ includes costs that vary with the level of production which include labor costs and raw materials.
Variable costs
___ includes costs that do not change with the level or production which include replacements, new purchases, and land & infrastructure.
Fixed costs
In the long run, all costs are ___.
Variable
In the short run, all costs are ___.
Both fixed and variable
___ refers to the human time used in the production process including skills and experience (human capital).
Labor
___ refers to the machines used in the production process and allows labor to work on it and produce output.
Capital
___ refers to any natural element used in the production process and includes raw materials, land, sun, air, etc.
Land (natural resources)
___ is a change in the ability of a firm to produce a given level of output with a given quantity of inputs.
Technological change
___ is the processes a firm uses to turn inputs into outputs of goods and services.
Technology
___ shows the relationship between inputs employed and the maximum output of the firm; production.
Production function
___ is the total quantity of a good produced in a given period.
Total product
___ is the change in total product that results from one-unit increase in the quantity of labor employed; the contribution to total product of adding one more worker.
Marginal product
___ occurs when the marginal product of an additional worker exceeds the marginal product of the previous worker leading to higher efficiency.
Law of increasing returns
___ occurs when marginal product starts falling with an additional worker leading to inefficiency.
Law of diminishing returns
___ is the total product per worker employed.
Average product
___ is the cost of all the factors of production the firm uses (FC+VC).
Total cost
___ is the cost of all a firm’s fixed factors of production used by a firm; do not change with output changes.
Total fixed costs
___ is the cost of all variable factor of production used by a firm
Total variable costs
___ is a firm’s change in cost that results from one-unit increase in total product; how much total cost changes as total product changes.
Marginal cost
___ is the total cost divided by the unit of output.
Average cost
___ is the total fixed cost per unit of output.
Average fixed cost
___ is the total variable cost per unit of output.
Average variable cost
___ is the total cost per unit of output.
Average total cost
When a firm changes its plant size, its cost of producing a given output changes. Which of the following three outcomes might they might experience:
a. Economies of scale
b. Diseconomies of scale
c. Constant returns to scale
ALL
___ occurs when a firm increases it’s plant size and labor employed by the same percentage, its output increases by a larger percentage and ATC decreases (specialization is the main source).
Economies of scale
___ occurs when a firm increases it’s plant size and labor employed by the same percentage, it’s output increases by a smaller percentage and ATC increases (inefficient coordination).
Diseconomies of scale
___ occurs when a firm increases it’s plant size and labor employed by the same percentage, it’s output increases by the same percentage and ATC remains constant.
Constant returns to scale
___ shows the lowest cost at which a firm is able to produce a given quantity of output in the long run when no inputs are fixed; traces the lowest attainable ATC of producing each output.
LRATC curve
Long-run average total cost
___ is the lowest level of output at which all economies of scale are exhausted.
Minimum efficiency scale
___ occurs when a firm’s LRATC remains unchanged as it increases output.
Constant returns to scale
___ are a curve showing all combinations of two inputs, such as capital and labor, that will produce the same level of output.
Isoquant lines
The relationship known as ___ is the rate at which a firm can trade input for input hold output constant.
Marginal rate of technical substitutions
___ are a graphical version of all the combinations of two inputs, such as capital and labor, that will produce the same level out output.
Isocost lines
Costs are minimized when ___.
The marginal product per dollar spent is equalized across inputs in one of two situations:
- More capital and less labor should be used in production
- More labor and less capital should be used in production
___ is the total monetary value of the goods and services hold.
Revenue
___ is the difference between revenue and cost.
Profit
You can conclude that a venture is worth pursuing if it results in an economic profit of ___.
0 or better
You can conclude that a venture is worth pursuing if it results in an accounting profit of ___.
Higher than 0
___ is the volume level that separates the range with economic loss from the range with economic profit.
Breakeven point
A ___ is the relationship between price charged and the maximum unit quantity that could be sold.
Demand curve
The Law of Demand states: ___.
Increase in price lead to decrease in demand
Decrease in price leads to increase in demand
___ are the rate of change in the function value corresponding to a modest change in Q.
Marginal measures
A general ___ principle states that the most profitable production level will be where marginal profit = 0.
Economic principle (Unless there is a constraint preventing a change to a more profitable production level)
A general ___ principle states that the most profitable production level will be where MR = MC.
Economic principle (In the absence of production level constraints)
The ___ rule states: if the selling price per unit is at least as large as the average variable cost per unit, the firm should continue to operate for at least a while; otherwise, the firm would be better to shut down operations immediately.
The shutdown rule
What is an appropriate overall objective for most businesses?
Maximize economic profit
If a firm doesn’t make enough to cover at least their economic costs, they are losing money
___ is the collective value of all economic profits into the future and approximately the amount the owners should expect to receive if they sold the business to a different set of owners.
The value of the firm
Not-for-profit firms utilize ___ to determine the value of the firm.
Cost-benefit analysis
Which of the following is the best example of a short run adjustment?
a. Smith University completed negotiations to acquire a large piece of land to build its new library.
b. Your local Wal-Mart hires two more associates.
c. A local bakery purchases another commercial oven as part of its capacity expansion.
d. Toyota builds a new assembly plant in Texas.
b. Your local Wal-Mart hires two more associates.
Unlike an accountant, an economist measures costs on a(n) ________ basis.
a. replacement
b. explicit
c. conservative
d. historical
a. replacement
Forgone opportunity vs Opportunity taken
When an economist uses the term “cost” referring to a firm, the economist refers to the
a. cost that can be actually verified and measured.
b. opportunity cost of producing a good or service, which includes both implicit and explicit cost.
c. implicit cost of producing a good or service but not the explicit cost of producing a good or service.
d. price of the good to the consumer.
e. explicit cost of producing a good or service but not the implicit cost of producing a good or service.
b. opportunity cost of producing a good or service, which includes both implicit and explicit cost.
Economic cost = Explicit + Implicit
Accounting costs
a. usually include implicit costs.
b. are historical costs.
c. usually include normal profits.
d. are replacements costs.
b. are historical costs.
Actual “explicit” costs
A firm earns a normal profit when its total revenues just offset both the ________ cost and ________ cost.
a. accounting; replacement
b. accounting; opportunity
c. explicit; accounting
d. historical; replacement
b. accounting; opportunity
Actual “explicit” costs and the costs of the forgone opportunity (you make just as much as you would’ve in forgone opportunity)
If Melissa owns a software company that incurs no fixed costs, then
a. her total cost equals her total variable cost.
b. her total variable cost is less than her total cost.
c. her total cost equals zero.
d. she will earn an economic profit.
e. her marginal cost must equal zero.
a. her total cost equals her total variable cost.
TC = FC + VC
In the short run, a firm cannot change the amount of capital it uses. Therefore the cost of capital is a
a. variable cost.
b. fixed cost.
c. productivity cost.
d. marginal cost.
e. short-run cost.
b. fixed cost.
Short run can be variable or fixed
Long run can only be variable
Because the amount of labor a firm employs can be changed, the cost of labor is known as
a. variable cost.
b. an unavoidable cost.
c. fixed cost.
d. maximum cost.
e. minimum cost.
a. variable cost.
Marginal cost equals
a. total cost minus total variable cost.
b. the change in total cost that results from a one-unit increase in output.
c. total fixed cost divided by total output.
d. total variable cost divided by total output.
e. the change in fixed cost that results from a one-unit increase in output.
b. the change in total cost that results from a one-unit increase in output.
Lauren runs a chili restaurant in San Francisco. Her total revenue last year was $110,000. The rent on her restaurant was $48,000, her labor costs were $42,000, and her materials, food and other variable costs were $20,000. Lauren could have worked as a biologist and earned $50,000 per year. An economist calculates her implicit costs as
a. $50,000.
b. $0 because Lauren did not work as a biologist.
c. $110,000.
d. $150,000.
e. $63,000.
a. $50,000.
The cost of the opportunity that she forgoes
All others are actual “explicit” costs
A factor of production that can be easily changed in the relevant time period is called a:
a. fixed input.
b. variable input.
c. temporary input.
d. substitution input.
b. variable input.
