chapter 7 Flashcards
is opportunity cost the same as accounting costs?
no
what costs to firms take in to account when making decisions?
opportunity costs
what is another term for opportunity costs?
economic costs
what is an example of opportunity costs?
giving up working full time to go to school
what is an example of accounting costs?
the money you have to pay to go to school
what are total costs made up of?
fixed costs plus variable costs
what is the formula for average total cost (ATC)?
total cost divided by quantity of output
what is average total cost?
the average total cost it takes to produce one unit of output
what is average fixed costs?
the average amount of fixed costs per one unit of output (typically doesn’t change with more units of output because they are fixed costs)
what is average variable costs?
the average amount of variable costs it takes to produce one unit of output
how are average variable costs and total output related?
they are positively related, the more you produce the higher average variable cost and variable costs are
what is marginal cost?
the change in total cost when one more unit of output is produced
what is the formula for marginal cost?
change in variable cost / change in output (fixed cost is not here because it doesn’t increase with change in output)
what are fixed costs?
costs that don’t change when you change production
what are accounting costs?
actual expenses plus depreciation charges for capital equipment
what is opportunity cost?
costs associated with opportunities given up when a firms resources are not put to their best alternative use
what are total cost (TC)?
total economic cost of production, consisting of fixed and variable costs
what are fixed costs (FC)?
fixed cost does not vary with the level of output- it must be paid even if there is no output
what is an example of fixed costs?
paying a mortgage on buildings, need to pay even if there is no output
what are variable costs (VC)?
costs that varies as output varies
what is average total cost (ATC)?
firms total cost divided by its level of output
what is average fixed cost (AFC)?
fixed cost divided by the level of output
what is average variable cost (AVC)?
variable cost divided by the level of output
what is marginal cost (MC)?
increase in cost resulting from the production of one extra unit of output
what is a fundamental problem that all firms face?
how to select inputs to produce a given output at a minimum cost (maximize output and minimize costs)
what is an isocost line?
it shoes all the possible combinations of labour and capital that can be purchased for a given total cost (similar to budget constraint line)
what is the equation for the isocost line?
C= wL+rK
C= total cost of producing output
w= wage
L= amount of labour
r= price pf capital
K=units of capital
using the isocost line equation, how could you solve for max amount of K or L?
rearrange the C=wL+rK to solve for L or K
what is the slope of isoquant line?
change in K/ change in L
what is the point of production that maximizes output and minimizes cost for a given cost?
when the slope of the isoquant (MRTS)= the slope isocost (w/r), when they are tangent
when the price of inputs become more expensive how does the slope of the isocost change?
it becomes steeper (it pivots the isocost)
when the costs of of both inputs increase or decrease how will that impact the isocost?
it will shift it
what happens to the most optimal point of cost?
it will change
when a firm operates in the short run, can they minimize their cost of production?
it may not be due to some of the fixed costs
can the same level of output be produced for cheaper in the long run or the short run?
in the long run its cheaper, due to the flexibility of their costs
what determines how much time is long term?
it depends on their fixed cost not the amount of time
what is long run average cost curve (LAC)?
the curve relating the average cost of production to output when all inputs including capital are variable
what is the short run average cost curve (SAC)?
the curve relating average cost of production to output when level of capital is fixed
what is the long run marginal cost curve (LMC)?
curve showing the change in long-run total cost as output is increased by one unit
