Chapter 13 and 14 Flashcards
Accounting Profit
rev from sales
- cost of materials
- cost of labor
- rent
- interest
- sales tax
- depriciation
Economic Profit
Accounting Profit
-what income could have been had the person did something else with their time
Meaning of Positive and Negative Economic Profit
Pos. Econ profit—> better off doing what they are doing now
Neg Econ Profit—> better off doing something else
Econ profit= $0–> up to preference, not better of doing either thing
Opportunity cost of business owners time
salary in alternate job
opportunity cost of owners capital
dividends from annual investment income
firm variable and fixed inputs in the short run
variable: hire more workers, buy more raw materials
fixed: physical capital
firm fixed and variable inputs in long run
all inputs are variable
short run production function
the relationship between amount of labor employed and quantity produced
Marginal cost (define and equation)
the change in total cost to produce the next unit
change in TC/change in Q
wage/ MP
marginal product
how much Q rises when you add one more unit of labor
law of diminishing returns
when you add more labor to a fixed amount of capital EVENTUALLY marginal product begins to diminish
—> fixed capital sets a ceiling for the amount a firm can achieve, once more labor is added, they won’t have a MP because there’s nothing for the new workers to do
Fixed cost in the short run
don’t change as Q changes, same $ figure regardless of Q
- even if Q=0 (shutdown) still must pay fixed cost (shutdown is only temporary)
- ex) rent, interest
variable cost in short run
vary as Q changes (as Q inc. cost inc.)
- can be lowered by shutting down
- ex) labor cost
relationship between MC and AVC (hint: think workers)
- MC=AVC for 1st worker
- Until point of diminishing returns, MCprevious AVC
costs in the long run
all costs are variable
firms can go out of business (# of firms is variable)
LRAC (formula)
TC/Q
constant returns of sale
AC remains constant in LR
economies of scale
as the firm grows, the costs fall (think apple computers example)
diseconomies of scale
as firm grows, cost increase
