3b. Costs Flashcards
What is the definition of “technical progress”?
an advance in knowledge that allows more output to be produced with the same level of inputs.
What is the definition of “organizational change”?
may also alter the production function and increase the amount of output produced by a given amount of inputs.
What is the difference between neutral and non-neutral technical changes?
Neutral technical change:
a firm can produce more output using the same ratio of inputs.
Non-neutral technical change:
innovations that alter the proportion in which inputs are used.
What is the equation of “opportunity costs”?
Opportunity Costs = Explicit Costs + Implicit Costs
Is opportunity cost the same as economic costs?
yes!
What is a “sunk cost”?
a past expenditure that cannot be recovered. When there are no alternative use of the good purchased.
Should a manager take “sunk cost” into consideration when making a decision?
No!
If an expenditure is sunk, it is not an opportunity cost.
What is a “fixed cost”?
a production expense that does not vary with output.
What is a “variable cost”?
a production expense that changes with the quantity of output produced.
What is the “total cost”?
the sum of a firm’s variable cost and fixed cost:
What is important to remember about cost curves in the short run?
fixed cost stays the same, not related to output
In the short run, only _____ changes
labor
What is the MC curve dependent on in the short run?
LABOR,
as capital can NOT change
What is a “marginal cost (MC)”
the amount by which a firm’s cost changes if the firm produces one more unit of output.
What is the link between MPL and MC in the short run?
As MC is only dependent on MPL in the SR (capital does NOT change)
MC is also the same as the wage rate multiplied by (change in labor / change in output)
or the inverse..
wage rate / MPL
What is the link between MPL curve and MC curve in the short run?
-> when MPL is high, the marginal cost will be low [AGAIN THIS IS IN THE SHORT RUN]
-> this explains why the MC curve below (in red) has this shape
What is important about the MC and AC curves?
dont forget that the MC and the AC curve CROSS at the point where the AC curve is at the lowest
