Chapter 14- Production And Cost

Question 1

The amount that a firm must pay their factors of production(their employees)
Sum of explicit costs and implicit costs

Answer 1

Opportunity cost

Question 2

Cost paid in money

Examples of explicit costs: cost of fruit, yogurt, honey

Answer 2

Explicit cost

Question 3

An opportunity cost incurred by a firm when it pays an employee
Firm does not make a direct money payment to employee
Examples of implicit costs: wages, economic depreciation, normal profit

Answer 3

Implicit cost

Question 4

opportunity cost of firm using its own resources

Answer 4

Economic depreciation (type of implicit cost)

Question 5

The return to the entrepreneur
A part of a firm’s opportunity cost
The cost of the entrepreneur not running another firm

Answer 5

Normal profit (type of implicit cost)

Question 6

Equals total revenue minus total cost
Total cost(opportunity cost of production) = sum of explicit costs and implicit costs

Answer 6

Firm’s Economic Profit

Question 7

The return to the entrepreneur

If a firm incurs an economic loss, the entrepreneur receives less than normal profit

Answer 7

Normal profit plus economic profit

Question 8

Measure opportunity cost as the sum of Explicit costs and accounting depreciation
Accounting profit= total revenue- accounting costs

Answer 8

Accountants

Question 9

Time frame in which the quantities of some resources are fixed
A firm can usually change the quantity of labor but NOT the quantity of resources
To increase output, quantity of labor must increase

Answer 9

Short run: FIXED PLANT

Question 10

Time frame in which quantities of all resources can be changed

Answer 10

Long run: VARIABLE PLANT

Question 11

Total quantity of a good produced in a given period
An output rate- # of units produced per unit of time
Increases as quantity of labor increases

Answer 11

Short run production

Total product

Question 12

The change in total product that results from a one unit increase in the quantity of labor employed
(Change in total product)
____________________________
(Change in quantity of labor)

Answer 12

Short run production

Marginal product

Question 13

Occur when the marginal product of an additional worker exceeds the marginal product of previous worker
Occur when a small number of workers are employed and they are specialized in certain things through division of labor

Answer 13

Increasing marginal returns

Question 14

Occur when the marginal product of an additional worker is less than the marginal product of the previous worker
Arise from the fact that more and more workers use the same equipment and work space (no division of labor)

Answer 14

Decreasing marginal returns

Question 15

As a firm uses more of a variable input, with a given quantity of fixed inputs, the marginal product of the variable input EVENTUALLY DECREASES

Answer 15

Law of decreasing returns

Question 16

Total product per worker employed
Average product= total product divided by quantity of labor
Another name for average product is PRODUCTIVITY
Ex: 3 workers produce a total product of 6 gallons per hour, so the average product is 6/3= 2 gallons PER WORKER

Answer 16

Short run production

Average product

Question 17

When marginal product EXCEEDS average product, average product is INCREASING
When marginal product is LESS than average product, average product is DECREASING
When marginal product=average product, average product is at its MAXIMUM

Answer 17

Marginal product vs average product

Question 18

Cost of all the factors of production a firm uses
Total fixed cost- cost of a firm’s fixed factors of production, like the land, capital, entrepreneurship. DOES NOT CHANGE AS OUTPUT CHANGES
Total variable cost- cost of the variable factor of production used by a firm, the cost of labor. CHANGES AS OUTPUT CHANGES

Total cost= TFC+TVC

Answer 18

Short run cost

Total cost

Question 19

TFC is constant and graphs as a horizontal line
TVC increases as output increases
Total cost also increases as output increases
Vertical distance between total cost curve and total variable cost curve is the total fixed cost

Answer 19

TFC vs TVC

Question 20

The Change in total cost that results from a one unit increase in total product

Answer 20

Short run cost

Marginal cost

Question 21

Average fixed cost- TFC per unit of output (TFC/quantity prod.)
Average variable cost- TVC per unit of output(TVC/quantity)
Average total cost- total cost per unit of output(TC/ quantity)

Answer 21

Short run cost

Average cost

Question 22

AFC decreases as output increases
AVC and ATC are U-shaped
Vertical distance between ATC and AFC is the AFC

Answer 22

AFC
AVC
ATC

Question 23

Arises from the influence of
Spreading total fixed cost over a larger output
Decreasing marginal returns

Answer 23

Average Total Cost curve is U-shaped

Question 24

Maximum marginal product means marginal cost is a minimum
Low levels of output and increase quantity of labor, then marginal product and average product rise, while marginal cost and AVC fall
At the point of maximum average product, AVC is at a minimum

Answer 24

Cost curves and product curves

Question 25

If marginal product rises, marginal cost falls
If marginal product is a maximum, then marginal cost is a minimum

If average product rises, AVC falls
If average product is a maximum, AVC is a minimum

Answer 25

Trends

Question 26

When a firm increases its plant size and employees by the same percentage, it’s output increases by a LARGER percentage and ATC DECREASES

Answer 26

Economies of scale

Question 27

When a firm increases its plant size and employees by the same percentage and its output increases by a SMALLER percentage and ATC INCREASES
Arise from the difficulty of coordinating and controlling a large enterprise

Answer 27

Diseconomies of scale

Question 28

When a firm increases its plant size and employees by the same percentage and its output increases by the SAME percentage and ATC remains CONSTANT
Occur when a firm us able to replicate its existing production facility including its management system

Answer 28

Constant returns to scale

Question 29

The lowest average total cost at which it is possible to produce each output when the firm has had sufficient time to change both its plant size and labor employed

Answer 29

Long run average cost