Chapter 2 Flashcards
Cost
inverse of benefit or value; listed in terms of dollars
Cost doesn’t matter…
feelings about price do
Cost always means
opportunity cost
opportunity cost is
what you give up when you incur cost
cost is the value of…
next best alternative (NBA), which is subjective
concept of choice implies
cost
opportunity cost is about
getting most out of resources
Accounting profit
what is on the books
economic profit
EP = (Accounting Profit) - (Opportunity cost)
A negative economic profit means
destroying value to society scarce resources
A positive economic profit means
adding value to society scarce resources
Profits signal
economic profit creation
Diminishing Marginal Return is about
How you allocate resources
Law of DMR
As more units of a variable resource are combined with a fixed number of another resource, then using additional units of variable resource will eventually increase output at decreasing rate.
Diminishing returns
= point where additional unit means marginal product is at peak, and beyond that a point at which Marginal product is zero
If marginal cost is lower than Average cost….
AC must fall
DMR means that marginal costs will begin to rise, eventually
AC will
Two kinds of cost
Fixed, Variable
Costs differ by
time horizon
Sunk cost fallacy
costs, once incurred, and cannot be recouped, should not affect future decisions
Formula for Average Cost
AC = (Total Cost/Quantity) = (FC/Q) + (VC/Q)
AC curve will always be
U shaped; Fixed costs overwhelm variable costs, eventually variable costs overwhelm fixed costs
Economies of scale
- you’re gaining more by producing more
- As output increases, AC will decline as fixed costs can be spread over more units
Diseconomies of scale
- AC will not slope downward over entire range of output
- As some point AC will begin o rise because MC will be upwards sloping and DMR will dominate
Average cost does not
tell a firm how much to produce to maximize profit
if a firm is maximizing profit, its producing so that
MC = MR
If MC does not equal MR
you’re loosing money at the margin
MC > MR
Marginal unit costs more to make than sell for, scale back production
MR > MC
Not producing enough, increasing production
MC will always intersect average cost
on graph at lowest point
Supply =
MC
Supply curves tell you
for any given quantity how much the firm needs to price per unit of output for it to be firms worthwhile to bring to market
Natural monopoly
when one firm dominates industry; if they tried to charge excessive prices, new startups may rise
Demand =
(MB) Marginal benefit, in dollars, due to DMU [The more of an identical item consumed, less additional satisfaction = less money willing to pay for it
Equillibrium
no one has any incentive to change behavior
When S = D
quantity demanded just equals the number of items firm is willing to bring to market
