Chapter 13 The Costs Of Production

Question 1

Law of supply definition

Answer 1

Firms are willing to produce and sell a greater quantity of a good when the price of a good is higher

Question 2

Total revenue defn

Answer 2

The amount that the firm receives for the sale of its output

Question 3

Total cost defn

Answer 3

The amount that a firm pays to buy inputs (flour, sugar, water)

Question 4

Profit equation

Answer 4

The firms total revenue minus total cost

Question 5

Explicit costs defn

Answer 5

Input costs that require an outlay (amount of money spent on something) of money by the firm

Question 6

Inplicit costs defn

Answer 6

Input costs that do not require an outlay (amount) of money by the firm

Question 7

Total cost of business eqn

Answer 7

Explicit costs + implicit costs

Question 8

Economic profit defn

Answer 8

Firms total revenue minus all opportunity costs

Question 9

Accounting profit defn

Answer 9

A firms total revenue minus explicit costs

Question 10

Production function defn

Answer 10

The relationship between quantity of inputs used to make a good and the quantity of output of that good

Question 11

Marginal product

Answer 11

The increase in output that arises from an additional unit of output ex. # of workers go from 1 —> 2, cookie production increases from 50–>90. The marginal product of the second worker is 40 cookies

Question 12

Diminishing marginal product

Answer 12

The property where the marginal product of an input decliens as the quantity of the input increases (ex. More workers means more sharing equipment in kitchen and each worker contributes less cookies)

Question 13

On a graph, what is the slope of the production function?

Answer 13

Marginal product of a worker (change in output / each additional input of labour)

Question 14

Fixed costs defn

Answer 14

Costs that do not vary with the quantity of output produced (ex. Rent is independent of how much coffee is produced)

Question 15

Variable cots def

Answer 15

Costs that vary with the quantity of output produced (ex. Cost of coffee beans, milk, sugar, is dependent on the amount of coffee sold)

Question 16

What is the eqn for total cost and how does it look like on a graph against quantity of output?

Answer 16

Fixed + marginal costs. It gets steeper with more quantity of output because of diminishing marginal product

Question 17

Average total cost eqn

Answer 17

Total cost/quantity “how much does it cost to make the typical cup of coffee?”

Question 18

Average fixed cost eqn

Answer 18

Fixed cost/Quantity of output

Question 19

Average variable cost eqn

Answer 19

Variable cost/quantity of output

Question 20

Marginal cost(MC) eqn

Answer 20

Change in total cost/change in quantity

Question 21

Where does MC intersect ATC

Answer 21

At the minimum (think GPA, if marginal is less than the whole GPA will decrease)

Question 22

Economies of scale def

Answer 22

The property whereby long run avg total cost falls as the quantity of output increases (higher production level allows specialization among workers)

Question 23

Diseconomies of scale def

Answer 23

The property whereby long run avg total cost rises as the quantity of output increases (coordination problems inherent in large organizations, ex. More cars produced means less effective managers at keeping costs down)

Question 24

Constant returns to scale def

Answer 24

The property where long run avg total cost stays the same as the quantity of output changes

Question 25

Why are long run ATC u-shaped? (2)

Answer 25

1. At low levels of production, firm benefits from increased size because greater specialization (thus ATC falls:))
2. At high levels of production, benefits of specializations have already been realized and coordination problem arise (thus ATC rises:((( )