Chapter 13 The Costs Of Production Flashcards
Law of supply definition
Firms are willing to produce and sell a greater quantity of a good when the price of a good is higher
Total revenue defn
The amount that the firm receives for the sale of its output
Total cost defn
The amount that a firm pays to buy inputs (flour, sugar, water)
Profit equation
The firms total revenue minus total cost
Explicit costs defn
Input costs that require an outlay (amount of money spent on something) of money by the firm
Inplicit costs defn
Input costs that do not require an outlay (amount) of money by the firm
Total cost of business eqn
Explicit costs + implicit costs
Economic profit defn
Firms total revenue minus all opportunity costs
Accounting profit defn
A firms total revenue minus explicit costs
Production function defn
The relationship between quantity of inputs used to make a good and the quantity of output of that good
Marginal product
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
Diminishing marginal product
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)
On a graph, what is the slope of the production function?
Marginal product of a worker (change in output / each additional input of labour)
Fixed costs defn
Costs that do not vary with the quantity of output produced (ex. Rent is independent of how much coffee is produced)
Variable cots def
Costs that vary with the quantity of output produced (ex. Cost of coffee beans, milk, sugar, is dependent on the amount of coffee sold)
What is the eqn for total cost and how does it look like on a graph against quantity of output?
Fixed + marginal costs. It gets steeper with more quantity of output because of diminishing marginal product
Average total cost eqn
Total cost/quantity “how much does it cost to make the typical cup of coffee?”
Average fixed cost eqn
Fixed cost/Quantity of output
Average variable cost eqn
Variable cost/quantity of output
Marginal cost(MC) eqn
Change in total cost/change in quantity
Where does MC intersect ATC
At the minimum (think GPA, if marginal is less than the whole GPA will decrease)
Economies of scale def
The property whereby long run avg total cost falls as the quantity of output increases (higher production level allows specialization among workers)
Diseconomies of scale def
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)
Constant returns to scale def
The property where long run avg total cost stays the same as the quantity of output changes
Why are long run ATC u-shaped? (2)
- At low levels of production, firm benefits from increased size because greater specialization (thus ATC falls:))
- At high levels of production, benefits of specializations have already been realized and coordination problem arise (thus ATC rises:((( )
