Ch.6 Short Run Prod. Decisions & Costs Flashcards
Crown Corporation is run by
Appointed Officials
Activity of business using inputs to obtain output of product
Production
The cost of
1. Using resources & might not pay $
(incl. Opportunity Costs)
2. $ Paid to non-owners
- Implicit Costs
- Explicit Costs
Accounting Profit
vs
Economic Profit
Acct. Profit =
Total Rev. - Total Explicit Costs
vs
Econ. Profit =
Total Rev. - Total Costs
(incl. implicit & explicit costs)
Min Profit Earned to keep the entrepreneur in business
Normal Profit
=Implicit Costs
Revenue over & above All Costs (incl. Normal Profits)
Economic Profit
(=Bonus)
- Unrecoverable Costs
- Irrelevant to Decision Making
- No current Resale Value
- No carry of Opportunity Costs
Sunk Costs
e.g. paid to consultant/ market research
In Production Process w/
1 Input / No Input
fixed
in any period of time.
Short Run / Long Run
Theory of Production
Dividing Production Process into series of specialized tasks, each done by diff. worker
Division of Labour
causes Marginal Product increase initially
Marginal Product MP
&
Average Product AP
MP = ∆TP/∆L
AP = TP/L
TP: total production
output/input
In Production Process,
as more of a variable input
is added to a fixed input,
resulting output increase
begins to diminish
Law of
Diminishing Returns
When
Marginal Product MP↑
Average Product AP?
MP↑
⇒ AP↑
Where is
the Point of
Diminishing Returns
Max. MP / Min. MC
Tho Output (TP)↑
Rate of ↑ ↓
Where is
the Point of
Max. Productivity
Max. AP / Min. AVC
if repeated, find where
MP=AP
Where is
the Point of
Max. Output
(Max Total Product)
MP = 0
(MC = ∞ doesn’t exist)
Where is
Economic Capacity
Min. ATC
經濟產能
the output at min. short-term
avg (total) cost curve
Production relates to
amt of ___
while
Costs relate to
amt of ___
Production
⇄ Labour amt
while
Costs
⇄ Production amt
TVC Total Var. Cost
MC Marginal Cost
AVC Avg Var. Cost
TVC ⇄ $
Marginal Cost
ΔTVC ΔTC
MC = ——— = ———
ΔTP ΔTP
Avg Var. Cost
TVC
AVC = ———
TP
TP: total production
input/output
When Level of Output ↑ behaviours of
TFC (Total Fixed Cost)
AFC (Avg Fixed Cost)
TFC UNCHANGED
AFC ↓
TC Total Cost
ATC Avg Total Cost
TC = TVC + TFC
ATC = AVC + AFC
= TC / TP
Reduction in Avg Costs (ATC)
rather than Total Cost (TC)
firm produces at
lowest possible cost for
each output level
Cutting Costs
3 Situations
Avg Costs ↓
cutting costs
- $ of Fixed/Var. Inputs↓
(cost) - Tech↑(⇒ MP↑)
- Output ↑@ Excess Capacity
or Output ↓ Above Economic Capacity
Costs↓⇒ Curves↓
Rental Pmt/ Insurance Prem./ Interest are examples of __ costs
(Total) Fixed Costs
Formula Comparison
Marginal Product MP
vs
Marginal Cost MC
MP = ∆TP/∆L
. ΔTVC
MC = ———
. ΔTP
TP: total production
Formula Comparison
Avg Product AP
vs
Avg Var. Cost AVC
AP = TP/L
. TVC
AVC = ———
TP
TP: total production
