Chapter 6 Flashcards
What are economic cost?
Economic costs are the payments a firm must make or the income it must provide to attract the resources it needs away from alternative production opportunities.
What is explicit costs?
Explicit costs are the monetary payments it makes to those who supply labour services, materials, fuels, transportation services etc. Explicit costs are payments for the use of resources owned by others
What are implicit costs?
Implicit costs are the opportunity costs of using its self-owned, self-employed resources. To firms, implicit costs are the money payments that self-employed resources could have earned in their best alternative use.
What are normal profits?
Normal profit is the payment made by a firm to obtain and retain entrepreneurial ability or the minimum income entrepreneurial ability must receive to induce it to perform entrepreneurial function for a firm.
Which costs are required to retain resources in a line of production?
In cost of production all the costs -explicit and implicit, including a normal profit, are required to attract and retain resources in a specific line of production.
How is economic costs and opportunity cost related?
For economists, a firm’s economic costs are the opportunity costs of resources used whether those resources are owned by others or the firm.
What is the difference between economic profit and accounting profit?
Economic profit includes implicit and explicit costs, its total revenue less economic costs. Accounting profit only identifies explicit costs
How is economic profit calculated?
Economic profit= Total revenue - Economic cost
What is economic profit?
- An economic profit is not a cost because it is a return in excess of the normal profit that is required to retain the entrepreneur in a particular line of production.
- Even if the economic profit is zero, the entrepreneur still has explicit and implicit costs including normal profit.
What is plant capacity?
Plant capacity is the size of the factory building, the amount of machinery and equipment and other capital resources
What is a short run?
A short run is a period that is too brief for a firm to alter its plant’s capacity but it is long enough to permit a change in the degree to which the fixed plant is fixed. Its long enough for you to change all your factors of production except one
What is a long run?
A long run is a period long enough for a firm to adjust all resources that it employs, all amounts of their inputs are used.
What is the difference between short run and long run?
The short run is fixed plant period, the long run is a variable-plant period
What is total product?
Total product (TP) - total quantity or total output of a particular good or service produced
What is marginal product?
Marginal product (MP) - the extra output or added product associated with adding a unit of a variable resource to the production process. MP = TP/input
What is average product?
Average product (AP) - output per unit of input. AP=TP/input
What is the law of diminishing returns?
The law of diminishing returns is that successive units of a variable resource are added to a fixed resource, beyond some point the (extra) marginal product that can be attributed to each additional unit of the variable resource decline.
What are assumptions in the law of diminishing returns?
The law of diminishing returns assumes that technology is fixed and the techniques of production do not change and are at equal quantity
What are the three phases of total product?
It rises initially at an increasing rate; then it increases, but at a diminishing rate; finally, after reaching a maximum, it declines
What is the marginal product curve?
Marginal product curve is the slope of the total-product curve
