Chapter 6 Flashcards
Profit
is the total revenue the firm receives from the sale of its products minus
all costs incurred in their production:
factors of production
- Labor
- Land
- Natural resources
- Capital: durable good used in production (example: machines)
The short run
is the time frame in which some factors of production cannot be changed.
The long run
is the time frame in which all factors of production can be altered.
The opportunity cost of an item
refers to all those things that must be
foregone to acquire that item.
Explicit costs
input costs that require an outlay of money by the firm
Implicit costs
input costs that do not require an outlay of money by the firm
economic profit
as total revenue minus total cost, including both explicit and implicit costs.
accounting profit
as the firm’s total revenue minus only the firm’s explicit costs
Sunk costs
are costs that have already been committed and cannot be recovered.
production function
is the relationship between the quantity of inputs used to make a good and the quantity of output of that good
The average product
is the total output divided by the variable factor of production.
Diminishing marginal product
The property whereby the marginal product of an input declines as the quantity of input increases.
Fixed costs FC
The costs of the fixed inputs. Costs that are not determined by the quantity of output produced
Variable costs VC(Q)
The costs of the firm’s variable inputs. Variable costs are dependent on the quantity of output produced
Total costs TC(Q)
The sum of fixed and variable costs
Marginal cost MC
The increase in total cost that arises from an extra unit of production.
average total cost curve
is U-shaped. As output increases, average total cost falls to a minimum and then increases. Influence of two opposing forces:
The efficient scale of the firm
is the quantity of output that minimizes average total costs. This is not necessarily what the firms would choose to produce when they maximize profits.
Constant returns to scale
Long-run average total cost stays the same as the quantity of output changes.
Economies of scale or increasing returns to scale
Long-run average total cost falls as the quantity of output increases.
Diseconomies of scale or decreasing returns to scale
Long-run average total cost rises as the quantity of output increases.
Internal economies of scale
The advantages of large-scale production that arise through the growth of the firm.
The basis of technical economies of scale
is that machinery and other factor
inputs can be utilized at bigger scales to bring down the unit cost of production.
External economies of scale
The advantages of large-scale production that arise through the growth and concentration of the industry.
