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Economics > Chap 7 - Costs > Flashcards

Chap 7 - Costs Flashcards

1
Q

Economically Efficient

A

minimizing the cost of producing a specified amount of output

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2
Q

Economic Cost or Opportunity Cost

A

the value of the best alternative use of a resource

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3
Q

Durable Good

A

a product that is usable for years (Ex: Capital)

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4
Q

Sunk Cost

A

a past expenditure that cannot be recovered

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5
Q

Fixed Cost (F)

A

a product that does not vary with output

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6
Q

Variable Cost (VC)

A

a production expense that changes with the quanity of output produced

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7
Q

Cost (total cost, Cost)

A

the sum of of a firm’s variable cost and fixed cost:

C = VC + FC

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8
Q

Marginal Cost (MC)

A

the amount by which a firm’s cost changes if the firm produces one more unit of output

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9
Q

Average Fixed Cost (AFC)

A

the fixed cost divided by the units of output produced: AFC = FC/q

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10
Q

Average Cost (AC)

A

the total cost divided by the units of output produced:

AC = C/q

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11
Q

Expansion Path

A

The cost minimizing combination of labor and capital for each output level.

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12
Q

Economies of Scale

A

property of a cost function whereby the average cost of production falls as output expands.

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13
Q

Diseconomies of Scale

A

property of a cost function whereby the average cost of production rises when output increases.

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14
Q

Learning by Doing

A

the productive skills and knowledge that workers and mangers gain from experience.

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15
Q

Learning Curve

A

the relationship between average costs and cumulative output.

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16
Q

Economies of Scope

A

situation in which it is less expensive to rpoduce goods jointly than separately

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17
Q

Production Possibility Frontier

A

the maximum amount of outputs that can be produced from a fixed amount of input

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18
Q

The nature of costs

A

when considering the cost of a proposed action, a good manager of a firm takes account of foregone opportunities.

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19
Q

Short-Run Costs

A

to minimize its costs in the short run, a firm adjusts its variable factors (such as labor), but it cannot adjust its fixed factors (such as capital).

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20
Q

Long-Run Costs

A

In the long run, a firm adjusts all its inputs because usually all inputs are variable.

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21
Q

Lower Costs in the Long Run

A

Long-run cost is as low or lower than short-run cost because the firm has more flexibility in the long run, technological progress occurs, and workers and managers learn from experience.

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22
Q

Cost of Producing Multiple Goods

A

If the firm produces several goods simultaneously, the cost of each may depend on the quantity of all goods produced

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23
Q

Explicit Costs

A

are direct, out-of-pocket payments for inputs to its production process within a given period of time.

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24
Q

Implicit Costs

A

These reflect only a foregone opportunity rather than an explicit, current expenditure.

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25
Q

Any profit maximizing competitive, monopolistic, or oligopolistic firm

A

minimizes its cost of production.

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26
Q

If the firm can rent capital for short periods of time, it calculates the cost..

A

of this capital in the same way that it calculates the cots of non-durable inputs such as labor

27
Q

The true opportunity cost of using a truck that the firm owns…

A

is the amount that the firm could earn if it rented the truck to others.

28
Q

Because only variable cost changes with output, we can also define marginal cost as…

A

the change in variable cost from a one-unit increase in output

29
Q

A firm uses marginal cost in deciding whether…

A

it pays to change its output levels

30
Q

If input prices are constant…

A

the production function determines the shape of the variable cost curve.

31
Q

The average cost at a particular output level is the slope of a line from…

A

the origin to the corresponding point on the cost curve

32
Q

The average variable cost is the slope of a line from..

A

the origin to a point on the variable cost curve

33
Q

The marginal cost is the slope of…

A

either the cost curve or the variable cost curve at a given output level.

34
Q

Where Marginal Cost is above average variable cost…

A

the average variable cost curve rise with output

35
Q

Where Marginal Cost is below the average variable cost…

A

the average variable cost curve falls with output.

36
Q

The production fuction

A
  1. ) determines the shape of a firm’s cost curves
  2. ) shows the amount of inputs needed to produce a given level of output
  3. ) The firm calculates its cost by multiplying the quantity of each input by its price and summing the costs of the inputs.
37
Q

If a firm produces output using capital and albor, and its capital is fixed in the short run, the firm’s variable cost is..

A

its cost of labor

- Its cost of is the wage per hour, w, times the number of hours of labor, L, employed by the firm: VC = wL

38
Q

MC =

A

w/MPl

39
Q

AVC =

A

(VC/q) = (wL/q) = (w/APl)

40
Q

A specific tax shifts the marginal cost and the average cost curves

A

upward by the amount of the tax. The after -tax marginal cost intersects the after-tax average cost at its minimum

41
Q

A franchise tax - also called a business license fee

A

is a lump sum that a firm pays for the right to operate a business

42
Q

What are the three cost-level curves?

A
  1. ) Total Cost
  2. ) Fixed Cost
  3. ) Variable Cost
43
Q

What are the four cost-per-unit curves?

A
  1. ) Average Cost
  2. ) Average Fixed Cost
  3. ) Average Variable Cost
  4. ) Marginal Cost
44
Q

What are the four basic concepts that we can use to derive most of what we need to know about the shapes and the relationships between the curves?

A
  1. ) In the short run, the cost associated with inputs that cannot be adjusted is fixed, while the cost from inputs that can be adjusted is variable.
  2. ) Given that input prices are constant, the shapes of the variable cost and cost curves are determined by the production function
  3. ) Where there are diminishing marginal returns to a variable input, the variable cost and cost curves become relatively steep as output increases, so the average cost, average variable cost, and marginal cost curves rise with output.
  4. ) Because of the relationship between marginals and averages, both the average cost and average variable cost curves fall when marginal cost is below them and rise when marginal cost is above them, so the marginal cost cuts both these average cost curves at their minimum points.
45
Q

To minimize its cost of producing a given level of output, a firm chooses its inputs so that the …

A

marginal rate of technical substitution equals the negative of the relative input prices.
- The firm picks inputs so that the rate at which it can substitute capital for labor in the production process, the MRTS, exactly equals the the rate at which it can trade capital for labor in input markets, - w/r.

46
Q

Isocost Line equation

A

C = wL + rK

47
Q

Algebraically, how can it be shown how much capital the firm can buy if it spends a total of C (constant) and purchases L units of labor?

A

K = (C/r) - (w/r)*L

48
Q

Is the slope of every isocost line the same?

A

Yes

49
Q

How can you tell which isocost line has higher costs?

A

The further from the origin the higher the cost of the isocost line.

50
Q

What is the slope of an isocost line?

A

-w/r

51
Q

What are the three equivalent approaches that a firm can choose to minimize its costs?

A
  1. ) Lowest-isocost rule. Pick the bundle of inputs where the lowest isocost line touches the isoquant.
  2. ) Tangency rule. Pick the bundle of inputs where the isoquant is tangent tot he isocost line.
  3. ) Last-dollar rule. Pick the bundle of inputs where the last dollar spent on one input gives as much extra output as the last dollar spent on any other input.
52
Q

Last Dollar Rule

A

Cost is minimized if inputs are chosen so that the last dollar spent on labor adds as much extra output as the last dollar spent on capital.

53
Q

How should the firm change its behavior if the cost of one of the factors changes?

A

The firm minimizes its new cost by substituting away from the relatively more expensive input towards the now relatively less expensive input.
- The change in an input’s price does not affect technological efficiency does not affect the pertinent isoquant.

54
Q

The shapes of the average cost and marginal cost curves depend …

A

on the shape of the long-run cost curve

55
Q

The shape of the long run curves is determined by…

A

the production function relationship between output and inputs.
- In the long run, returns to scale play a major role in determining the shape of the average cost curve and other cost curves.

56
Q

The shapes of the average cost curves indicate whether

A

the production process has economies or diseconomies of scale.

57
Q

Average Cost =

A

Cost / quantity

58
Q

What is a cost equation for non substitutable inputs?

A

C = (w + r)*q

59
Q

The long-run average cost curve is the…

A

solid, scalloped section of the three short-run cost curves (pg. 212)

60
Q

Lower-run cost is lower than short-run cost because the …

A

firm has more flexibility in the long run

61
Q

The three major explanations for average cost falling over time are…

A
  1. ) Technological or organziational progress
  2. ) Operating at a larger (or at least better) scale in the ong run may lower average cost due to increasing returns to scale.
  3. ) The firm’s workers and managers may become more proficient over time due to learning by doing.
62
Q

The production possibility frontier has what shape and why?

A

It is concave (the middle of the curve is farther from the origin than it would be if it were a straight line) because of the diminishing marginal returns from collecting only one of the two goods.

63
Q

If the production possibility were straight were a straight line than…

A

the cost of producing the two goods jointly would not be lower.

Economics (12 decks)

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