Chapter 13 - The Costs of Production Flashcards
Profit
Total revenue - total cost
How much you make minus the cost of all the efforts to produce
Explicit Cost
something that requires an actual chas out
(Accountants job)
Implicit Cost
The opportunity cost of what you could’ve had instead
(Economists job)
Important to note that these costs can be hard to think of, for example the interest earned on saved money that someone spends on buying something
Economic Profit
The profit you make minus all the opportunity cost
Accounting Profit
The profit you make minus the cost of production (explicit cost)
Production Function
The relationship between the inputs (labour) and the outputs (the product)
Marginal Product
Is the number of products an additional input provides
(ex. one more worker makes 40 cookies)
Diminishing Marginal Product
When each additional input starts decreasing in its production
(worker 1 to 2 - 50 to 60, worker 2 to 3 - 60 to 65)
Fixed Costs
Cost that does not depend on profit.
(ex. rent of a restaurant)
Variable Cost
Change as the quantity of output changes
(Ex. ingredients for something)
Total Cost
The sum of fixed and variable cost
Average Total Cost
The average cost of producing one output
Total cost divided by number of outputs
Average Total Cost = Total Cost / Quantity
Average Fixed Cost
The fixed cost divided by the number of outputs
The average fixed cost tends to get smaller with every output because you are dividing a fixed number by a rising number of outputs
Average Variable Cost
The variable cost divided by the number of outputs
The average variable cost usually stays constant because variable cost depends on the number of outputs, so with an increase in outputs theres an increase in variable cost
Marginal Cost
Refers to the cost of producing one more additional unit
Marginal Cost = Change in total cost / change in quantity
Marginal Cost Versus Average Cost
Marginal Cost is the cost of simply making one more output, could be cheap or expensive, this is how business regulate how much they’re producing
Average Cost is the cost per output pf the total number of outputs being produced
Rising Marginal Cost
The increase in marginal cost will eventually not be good because of diminishing marginal product, it works the same way because then the cost is not worth it anymore, the more it rises
Average Total Cost
The average total cost will have a downward slope initially because the fixed cost is being “spread out” as more outputs are produced however once the fixed cost “runs out” the variable cost will cause the slope to start rising
Efficient Scale
Is the point in the average total cost that is most ideal for a seller, where fixed cost is being spread out so much that the ATC is so low, but it is right before the variable cost takes over and makes the cost rise
Marginal Cost and Average Total Cost
When marginal cost is increasing ATC is decreasing , then it hits the efficient scale which is where they intersect, and then MC continues to be higher than ATC
They don’t intersect again
3 Points to Remember
Marginal cost eventually rises with the quantity of output.
The average-total-cost curve is U-shaped.
The marginal-cost curve crosses the average-total-cost curve at the minimum
of average total cost.
Long Term Versus Short Term Curves
A short term curve will be lower in quantity if its a smaller factory for example
A long term curve is spread out much longer because factories grow overtime
Economies of Scale
Average total cost decreases as output increases
As more people are hired more output is produced through specialization - people focus on what they’re good at
Diseconomies of Scale
Average total cost increase when outputs decrease
Once theres too many workers it starts to become inefficient
Constant Returns to Scale
Average total cost does not vary with output levels
