Chapter 13: The Costs of Production Flashcards
Define ‘Total revenue (for a firm)’.
The amount a firm receives for the sale of its outputs.
Define ‘Total cost’.
The market value of the inputs a firm uses in production.
Define ‘Profit’.
Total revenue minus total cost.
Define ‘Explicit costs’.
Input costs that require an outlay of money by the firm.
I.e. wages paid to workers.
Define ‘Implicit costs’.
Input costs that do not require an outlay of money by the firm.
I.e. wages given up by not doing another job.
Define ‘Economic profit’.
Total revenue minus total cost, including both explicit and implicit costs.
Define ‘Accounting profit’.
Total revenue minus total explicit cost.
Define ‘Production function’.
The relationship between quantity of inputs used to make a good and the quantity of output of that good.
Define ‘Marginal product’.
The increase in output that arises from an additional unit in input.
Define ‘Diminishing marginal product’.
The property whereby the marginal product of an input declines as the quantity of the input increases.
Define ‘Fixed costs (FC)’.
Costs that do not vary with the quantity of output produced.
Define ‘Variable costs (VC)’.
Costs that do vary with the quantity of output produced.
Define ‘Average total cost (ATC)’.
Total costs divided by the quantity of output.
Define ‘Average fixed cost (AFC)’.
Fixed costs divided by the quantity of output.
Define ‘Average variable cost (AVC)’.
Variable costs divided by the quantity of output.
Define ‘Marginal cost (MC)’.
The increase in total cost that arises from as extra unit of production.
Define ‘Efficient scale’.
The quantity of output that minimizes average total cost.
Define ‘Economies of scale’.
The property whereby long-run average total cost falls as the quantity of output increases.
Define ‘Diseconomies of scale’.
The property whereby long-run average total cost rises as the quantity of output increases.
Define ‘Constant returns of scale’.
The property whereby long-run average total cost stays the same as the quantity of output changes.
What are the equations for the many types of costs?
TC = FC + VC AFC = FC / Q AVC = VC / Q ATC = TC / Q MC = ΔTC / ΔQ
The goal of firms is to…?
Maximise profit.
A firms costs reflect its production process. A typical firm’s ___ ___ gets flatter as the quantity of an input increases, displaying the property of diminishing marginal product. As a result, a firm’s ___-___ ___ gets steeper as the quantity produced rises.
Production function.
Total-cost curve.
When analyzing firm behavior, it is often useful to graph average total cost and marginal cost. For a typical firm, marginal cost ___ with the quantity of output. Average total cost first ___ as output increases and then ___ as output increases further. The marginal-cost curve always crosses the average-total-cost curve at the ___ of average total cost.
Rises.
Falls, then rises.
Minimum.
A firm’s costs often depend on the time horizon being considered. In particular, many costs are ___ in the short run but ___ in the long run. As a result, when the firm changes its level of production, average total cost may rise more in the short run than in the long run.
Fixed and variable.
