Chapter 12 and 13 Flashcards
What is a firm?
Is an institution that uses resources to produce and sell goods and service.
The goal of a firm is to maximize profit.
Saje is a firm and we sell goods and services
What is Explicit Costs?
Explicit costs
Costs paid by the firm to run the business.
Example: wages, input costs, interest payments, rent, materials, machines
No hidden cost
Firm pays workers, the wage is a explicit cost
What is Impicit Costs?
Implicit costs
represent forgone opportunities (opportunities thatcould havegenerated revenueifthe firm had invested its resources in another way)
Example: what the resources used to produce a particular good or service could earn in other uses.
Hidden Cost
What is Economic and Accounting Profit?
Accounting profit:
Total revenue minus explicit costs
Economic profit:
Total revenue minus explicit and implicit costs
What is Short Run versus Long Run?
Short Run:
A time period when at least one input, such as plant size, cannot be changed.
Long Run:
The time period in which all factors of production can be varied.
Rocky Mountain Chocolate has expanded out to more than 40 countries so it is considered Long Run
When it was starting up it was considered Short Run
Some Concepts?
Inputs - ingredients that go into production process (raw materials, labour, machines, time, ideas)
Outputs – goods and services produced
Production function - relationship between the quantity of inputs and the quantity of outputs
Marginal product - increase in output that can be produced by additional investment
Average Physical Product - Total product divided by the variable input.
Diminishing marginal product - principle states that the marginal product of an input decreases as the quantity of the input increases
For example, a worker may produce90 units per hour for 20 hours. In the 21st hour, the output of the worker may drop to 70 units per hour.
What is Total, Average and Marginal Product Table?
Initially adding more workers will increase marginal product
Eventually, marginal product starts to decrease
This is called diminishing marginal product
An example is a plot of land, when we hire more people to help than we will see more productivity, but when we add to many people are land is still fixed so we will not produce any more than the land can offer but be using to many people for no reason
What is Fixed and Variable Costs?
Fixed costs- don’t depend on the quantity of output produced(expenses on machines, buildings, salaried employees)
Variable costs - depend on the quantity of output produced (raw materials that go into production, many types of labor costs)
What is Short-Run Costs to the Firm?
Total Costs (TC) : TVC + TFC
Marginal Cost (MC) = change in total cost/change in output
Average Total Costs (ATC) = total costs (TC)/Output (Q)
Average Variable Costs (AVC) = Total Variable Costs (TVC)/Output (Q)
Average Fixed Costs (AFC) = Total Fixed Costs (TFC)/ Output (Q)
What is Total Revenue, Total Costs, Profit?
Total revenue:
Amount received from the sale of goods and services
Quantity of each product the firm sells, multiplied by the price at which it’s sold
Total costs:
Amount paid for all inputs that go into producing goods and services, including:
One-timeexpenses (e.g., buying a machine)
Ongoingexpenses (e.g., rent, employee salaries, raw materials, advertising)
Profit- Difference between total revenue and total cost
profit = total revenue − total cost
Long Run Cost Curves?
Long-Run Average Cost Curve:
The locus of points representing the minimum unit cost of producing any given rate of output, given current technology and resource prices.
Returns to Scale?
Economies of scale:
Operating on a larger scale may lower average costs
Diseconomies of scale:
Point at which increasing scale leads tohigheraverage costs
Constant returns to scale:
Various scales at which a firm can operate without experiencing higher or lower average costs
Returns to Scale Diagram:
It is a U shaped graph
Average Cost is the top left of the U
The left curve is the Economies of Scale: when cost per unit goes down as output increases, there are economies of scale
The middle portion is the Constant returns to Scale: When cost stay constant as output increases, there are constant returns to scale
Long-Run Average Total Costs (ATC)
The right curve is Diseconomies of Scale: When the cost per unit increases as output increases, there are diseconomies of scale
What is Perfect Competition?
1) Large number of buyers and sellers
2) Homogeneous (standardized)products
3) Easy entry and exit
4) Perfect market information.
5) Each firm is a price taker not price maker.
Perfect Competition Expanded:
Keep producing as long as marginal cost is less than marginal revenue
Profit-maximizing quantity – is a quantity at which the marginal revenue of the last unit is exactly equal to the marginal cost
If MR > MC profits are increasing by making more, good for firm
If MC > MR, profits are decreasing, bad for firm
