CHAPTER 10: Outputs & Costs Flashcards
Firm
institution that hires factors or production & organizes those factors to produce & sell goods & services
The ultimate goal of firms is to….
maximize profit
Depreciation describes a fall in the….
Value of a firms capital
Economic profit
equal to total revenue minus total cost (total cost = opportunity cost of production)
What is the opportunity cost of production?
value of the best alternative use of the resources that a firm uses in production
Describe the opportunity cost of production for resources bought in the market
firm could have bought different resources to produce some other good/service
E.g. Campus Sweaters bought wool, utilities, labour, leased a computer, & a bank loan in the market
Spent $230,000 on these items which could’ve been used on something else
Describe the opportunity cost of production for resources owned by the firm
firm could sell the capital it owns & rent capital from another firm
Implicit Rental Rate - opportunity cost of using the capital one owns
Economic Depreciation - fall in the market value of a firms capital over a given period
Forgone Interest - funds used to buy capital could’ve been used to earn interest
Describe the opportunity cost of production for resources supplied by the firm owner
○ Entrepreneurship - factor of production that organizes a firm & makes decisions that might be supplied by firms owner or a hired CEO
Normal profit - profit that an entrepreneur earns on average
□ Cost of entrepreneurship & production
○ Owner may supply labour but not take a wage - opportunity cost is the wage income forgone
What is a profit prospect?
expectation that total revenue will exceed total cost
Describe the short run decision timeframe
Short Run - quantity of at least one factor of production is fixed
E.g. capital, land, & entrepreneurship is fixed; labour is variable
Increase output by increasing the quantity of the variable factor (labour)
easily reversible - can be increased or decreased
Describe the long run decision timeframe
Long-Run - quantities of all factors of production can be varied
Firm changes its plant (fixed variables), along w/ quantity of variable (labour)
Not easily reversed; firm sticks with decisions for some time
can led to sunk cost - past expenditure on a plant that has no resale value
Fixed factors (e.g. capital, land, & entrepreneurship) are considered the
firm plant
Total Product
max output that a given quantity of labour can produce
○ E.g. as a company employs more labours, total product increases
○ E.g. 1 worker employed, total product = 4 sweaters/day; 2 workers employed, total product = 10 sweaters/day
Marginal Product
increase in total product that results from a one-unit increase in the quantity of labour employed (all other inputs remain the same
E.g. employment increase from 2 to 3 workers, marginal product of the 3rd worker is 3 sweaters; total product increases from 10 to 13
Average Product
how productive workers are on average
Total product divided by the quantity of labour employed
E.g. average product of 3 workers = 4.33 sweaters/worker; 13 sweaters a day divided by 3 workers
According to total product curve, as employment increases, the curve becomes ______.
As employment decreases, curve becomes ____
- steep
- less steep
Points that are below & on the total product curve are_____.
Below - attainable & inefficient; use more labour than necessary to produce a given output
On the Curve - attainable & efficient
RECALL: how do we measure the slope of a curve?
change in the value of the variable measured on the y-axis (output) divided by the change in the variable measured on the x-axis (labour)
How do we measure marginal product?
slope of curve
The shape of two product curves may be similar even though total & marginal product differ. Why?
1) Increasing Marginal Return - marginal product of an additional worker exceeds marginal product of the previous worker
- Occurs when there is increased specialization & division of labour
- E.g. Campus sweaters hires a 2nd worker allowing 2 workers to specialize in different tasks & produce more than 1 worker alone
2) Diminishing Marginal Return - marginal product of an additional worker is less than the marginal product of the previous worker
- Arises from the fact that more workers are using the same capital & working in the same space - less productive work
The law of diminishing returns states that as a firm_________.
uses more of a variable factor of production w/ a given quantity of the fixed factor of production, the marginal product of the variable factor eventually diminishes
When is average product the largest?
when avg product & marginal product are equal
For the # of workers at which marginal product > avg product ______
avg product increasing
Average product decreases when ______
the # of workers at which marginal product < avg product
Total Cost (TC = TFC +TVC)
(TC) - cost of all factors of production
Total Fixed Cost (TFC) - cost of fixed factors (same across all outputs)
Total Variable Cost (TVC) - cost of variable factors
marginal cost
increase in total cost that results from a one-unit increase in output
At small outputs, marginal cost decreases as____
output increases because of greater specialization & division of labour
What are the 3 types of average cost?
○ Average Fixed Cost (AFC) - total fixed cost per unit of output
○ Average Variable Cost (AVC) - total variable cost per unit of output
○ Average Total Cost (ATC) - total cost per unit of output
When marginal cost is < avg cost…..
avg cost decreasing
When Marginal cost > avg cost……
avg cost increasing
Firms achieve technological efficiency when ______
they produce output with the fewest inputs possible given the available technology
Economic efficiency occurs when firms produce output at the lowest possible cost.
Total product curve shows
output & different quantities of input
Average total cost is the sum of
AFC & AVC
Why is the ATC curve u-shaped?
1) Spreading total fixed cost over a larger output
2) Eventually diminishing returns
When firm increases output, its TFC is spread over a larger output so AFC decreases - AFC curve slopes downwards
As output increases, AVC decreases initially but eventually increases & AVC curves slopes upwards - U-shaped
For each short-run ATC curve, the larger the plant_________
greater the output at which average total cost is at a minimum
The position of a firms short-run cost curve depends on what 2 factors?
Technology - change that increases productivity increases the marginal product & average product of labour
Prices of Factors of Production:
Increase in rent/fixed costs - shifts TFC & AFC curve upwards & shifts TC curve upwards
□ Leaves AVC & TVC & MC curves unchanged
Increase in variable costs (wages, gas, etc.) - TVC, AVC & MC shift upwards
□ AFC & TFC unchanged
What is long-run cost?
Firm can vary both the quantity of labour & quantity of capital, so in the long-run all the firms cost are variable
Behaviour of long-run cost depends on the firms____
production function - relationship between the maximum output attainable & the quantities of labour & capital
Marginal product of capital
change in total product divided by the change in capital when the quantity of labour is constant
Change in output from 1 unit increase in quantity of capital
When a firm is producing output at the least possible cost, it is operating on its
long-run average cost curve - Relationship between the lowest attainable average total cost & output when the firm can change both the plant it uses & the quantity of labour it employs
What is the differences between economies & diseconomies of scale?
- Economies of Scale - features of tech that make avg total cost fall as output increases
○ LRAC curve slopes downwards
○ Results from greater specialization of labour & capital - Diseconomies of Scale - features of tech that make ATC rise as output increases
○ LRAC slopes upwards
○ Results from challenges of managing a large enterprise
Constant return to scale is____
features of a firms tech that keep ATC constant as output increases
LRAC - horizontal
Minimum efficient scale
smallest output at which long-run avg cost reaches lowest level
Market where minimum efficient scale is small relative to market demand
market has room for many firms & is competitive
Market where minimum efficient scale is large relative to market demand
small # of firms (possibly 1) that can make profit & market is either oligopoly & monopoly
