CH7: Cost of Production Flashcards
Why is the utility approach useful in understanding consumer behavior?
It explains how consumers make choices to maximize satisfaction under constraints.
What is a firm in economics?
A profit-seeking business that provides goods or services.
What is the main goal of a firm in standard economic theory?
To maximize profit.
What is the principal-agent problem?
A conflict where agents (e.g., managers) pursue goals not aligned with principals (e.g., owners).
How is total revenue calculated?
TR = Price × Quantity sold.
What is average revenue (AR)?
AR = Total Revenue ÷ Quantity sold.
What is marginal revenue (MR)?
The additional revenue from selling one extra unit.
What is profit?
Profit = Total Revenue – Total Cost.
What are explicit costs?
Direct monetary payments for inputs.
What are implicit costs?
Opportunity costs for using self-owned resources.
What is normal profit?
The minimum return needed to keep resources in their current use; part of cost.
What is economic cost?
Economic cost = Explicit costs + Implicit costs.
What is accounting profit?
TR – Explicit Costs.
What is economic profit?
TR – (Explicit + Implicit Costs), including normal profit.
What defines the short run in production theory?
At least one input is fixed.
What defines the long run in production theory?
All inputs are variable.
What is total product (TP)?
The total output produced from inputs.
What is average product (AP)?
AP = TP ÷ Input quantity.
What is marginal product (MP)?
The additional output from using one more unit of input.
What is the law of diminishing returns?
MP decreases as more units of a variable input are added to fixed inputs.
What is total cost (TC)?
The total cost of producing a specific quantity of output.
What is average cost (AC)?
AC = TC ÷ Quantity.
What is marginal cost (MC)?
MC = Change in total cost ÷ Change in quantity produced.
What happens when MC > AC?
Average cost increases.
