CH7: Cost of Production Flashcards
How are total, average, and marginal cost calculated?
TC = Fixed Cost + Variable Cost. / The total cost of producing a specific quantity of output. / AC = Total Cost ÷ Output. / AC = TC ÷ Quantity. / MC = Change in total cost ÷ Change in quantity produced.
How are total, average, and marginal revenue calculated?
TR = Price × Quantity sold. / AR = Total Revenue ÷ Quantity sold. / The additional revenue from selling one extra unit.
What characterizes the long-run production period?
All inputs are variable.
What characterizes the short-run production period?
At least one input is fixed. / A period during which at least one input is fixed.
What is a firm in economics?
A profit-seeking business that provides goods or services.
What is economic profit?
TR – (Explicit + Implicit Costs), including normal profit.
What is normal profit?
The minimum return needed to keep resources in their current use; part of cost.
What is the primary goal of a firm in economics?
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 average fixed cost (afc) calculated?
AFC = Fixed Cost ÷ Output.
how is average product (ap) calculated?
AP = Total Product ÷ Units of Labour.
how is average variable cost (avc) calculated?
AVC = Variable Cost ÷ Output.
what are explicit costs?
Direct monetary payments for inputs.
what are implicit costs?
Opportunity costs for using self-owned resources.
what does the law of diminishing returns state?
As more of a variable input is added to fixed inputs, the marginal product will eventually decline.
what happens to ap when mp is above it?
AP increases.
what happens to tp when mp becomes negative?
TP begins to decline.
what happens when mc = ac?
Average cost remains unchanged.
what happens when mc > ac?
Average cost increases.
what is accounting profit?
TR – Explicit Costs.
what is average product (ap)?
AP = TP ÷ Input quantity.
what is economic cost?
Economic cost = Explicit costs + Implicit costs.
what is fixed cost (fc)?
Cost that does not vary with output.
what is marginal product (mp)?
The additional output from using one more unit of input.
what is profit?
Profit = Total Revenue – Total Cost.
what is the difference between variable and fixed inputs?
Variable inputs change with output; fixed inputs stay constant in the short run.
what is the law of diminishing returns?
MP decreases as more units of a variable input are added to fixed inputs.
what is the production function?
A mathematical relationship showing how inputs (e.g., labour and capital) are converted into output: Q = f(L, K).
what is total product (tp)?
The total output produced from inputs.
what is variable cost (vc)?
Cost that varies directly with output.
when is ap at its maximum?
When AP = MP.
why is the utility approach useful in understanding firm behavior?
It explains how consumers make choices to maximize satisfaction under constraints.
