Chapter 13 - The Costs of Production

Question 1

Profit

Answer 1

Total revenue - total cost

How much you make minus the cost of all the efforts to produce

Question 2

Explicit Cost

Answer 2

something that requires an actual chas out
(Accountants job)

Question 3

Implicit Cost

Answer 3

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

Question 3

Economic Profit

Answer 3

The profit you make minus all the opportunity cost

Question 4

Accounting Profit

Answer 4

The profit you make minus the cost of production (explicit cost)

Question 5

Production Function

Answer 5

The relationship between the inputs (labour) and the outputs (the product)

Question 6

Marginal Product

Answer 6

Is the number of products an additional input provides

(ex. one more worker makes 40 cookies)

Question 7

Diminishing Marginal Product

Answer 7

When each additional input starts decreasing in its production

(worker 1 to 2 - 50 to 60, worker 2 to 3 - 60 to 65)

Question 8

Fixed Costs

Answer 8

Cost that does not depend on profit.

(ex. rent of a restaurant)

Question 9

Variable Cost

Answer 9

Change as the quantity of output changes

(Ex. ingredients for something)

Question 10

Total Cost

Answer 10

The sum of fixed and variable cost

Question 11

Average Total Cost

Answer 11

The average cost of producing one output

Total cost divided by number of outputs

Average Total Cost = Total Cost / Quantity

Question 12

Average Fixed Cost

Answer 12

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

Question 13

Average Variable Cost

Answer 13

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

Question 14

Marginal Cost

Answer 14

Refers to the cost of producing one more additional unit

Marginal Cost = Change in total cost / change in quantity

Question 15

Marginal Cost Versus Average Cost

Answer 15

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

Question 16

Rising Marginal Cost

Answer 16

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

Question 17

Average Total Cost

Answer 17

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

Question 18

Efficient Scale

Answer 18

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

Question 19

Marginal Cost and Average Total Cost

Answer 19

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

Question 20

3 Points to Remember

Answer 20

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.

Question 21

Long Term Versus Short Term Curves

Answer 21

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

Question 22

Economies of Scale

Answer 22

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

Question 23

Diseconomies of Scale

Answer 23

Average total cost increase when outputs decrease

Once theres too many workers it starts to become inefficient

Question 24

Constant Returns to Scale

Answer 24

Average total cost does not vary with output levels