Chapter 14- Production And Cost Flashcards
The amount that a firm must pay their factors of production(their employees)
Sum of explicit costs and implicit costs
Opportunity cost
Cost paid in money
Examples of explicit costs: cost of fruit, yogurt, honey
Explicit cost
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
Implicit cost
opportunity cost of firm using its own resources
Economic depreciation (type of implicit cost)
The return to the entrepreneur
A part of a firm’s opportunity cost
The cost of the entrepreneur not running another firm
Normal profit (type of implicit cost)
Equals total revenue minus total cost Total cost(opportunity cost of production) = sum of explicit costs and implicit costs
Firm’s Economic Profit
The return to the entrepreneur
If a firm incurs an economic loss, the entrepreneur receives less than normal profit
Normal profit plus economic profit
Measure opportunity cost as the sum of Explicit costs and accounting depreciation
Accounting profit= total revenue- accounting costs
Accountants
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
Short run: FIXED PLANT
Time frame in which quantities of all resources can be changed
Long run: VARIABLE PLANT
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
Short run production
Total product
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)
Short run production
Marginal product
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
Increasing marginal returns
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)
Decreasing marginal returns
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
Law of decreasing returns
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
Short run production
Average product
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
Marginal product vs average product
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
Short run cost
Total cost
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
TFC vs TVC
The Change in total cost that results from a one unit increase in total product
Short run cost
Marginal cost
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)
Short run cost
Average cost
AFC decreases as output increases
AVC and ATC are U-shaped
Vertical distance between ATC and AFC is the AFC
AFC
AVC
ATC
Arises from the influence of
Spreading total fixed cost over a larger output
Decreasing marginal returns
Average Total Cost curve is U-shaped
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
Cost curves and product curves
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
Trends
When a firm increases its plant size and employees by the same percentage, it’s output increases by a LARGER percentage and ATC DECREASES
Economies of scale
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
Diseconomies of scale
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
Constant returns to scale
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
Long run average cost
