Chapter 7 Flashcards
Explicit costs
Payments to non-owners of a firm for their resources.
Implicit costs
The opportunity costs of using resources owned by a firm.
Economic profit
Total revenue minus explicit and implicit costs.
Normal profit
The minimum profit necessary to keep a firm in operation. A firm that earns normal profit earns total revenue equal to its total opportunity cost.
Fixed input
Any resource for which the quantity cannot change during the period of time under consideration.
Variable input
Any resource for which the quantity can change during the period of time under consideration.
Short run
A period of time so short that there is at least one fixed input
Long run
A period of time so long that all inputs are variable.
Production function
The relationship between the maximum amounts of output that a firm can produce and various quantities of inputs.
Law of diminishing returns
The principle that beyond some point the marginal product decreases as additional units of a variable factor are added to a fixed factor.
Total fixed cost (TFC)
Costs that do not vary as output varies and that must be paid even if output is zero. These are payments that the firm must make in the short run, regardless of the level of output.
Total variable cost (TVC)
Costs that are zero when output is zero and vary as output varies.
Total cost (TC)
The sum of total fixed cost and total variable cost at each level of output.
Average fixed cost (AFC)
Total fixed cost divided by the quantity of output produced.
Average variable cost (AVC)
Total variable cost divided by the quantity of output produced.
Average total cost (ATC)
Total cost divided by the quantity of output produced.
Marginal cost (MC)
The change in total cost when one additional unit of output is produced.
Marginal-average rule
The rule states that when marginal cost is below average cost, average cost falls. When marginal cost is above average cost, average cost rises. When marginal cost equals average cost, average cost is at its minimum point.
Long-run average cost curve (LRAC)
The curve that traces the lowest cost per unit at which a firm can produce any level of output when the firm can build any desired plant size.
Economies of scale
A situation in which the long-run average cost curve declines as the firm increases output.
Constant returns to scale
A situation in which the long-run average cost curve does not change as the firm increases output.
Diseconomies of scale
A situation in which the long-run average cost curve rises as the firm increases output.
Short run Capital
Less flexible
Short run Labor
More flexible
Total product Graph Shape
convect -> concave (S shape)
maximum of Average Product
Intersect of AP and MP
Marginal Product
?/?
changeQ/ChangeL
slope function of total product
Marginal Product
Marginal Product graph shape
Inverted U shape
TC = ? + ?
TFC + TVC
ATC = ? + ?
AFC + AVC
Shortrun starts at
TFC
Longrun start at
origin
Variable Cost = ?*?
Wage * Labor
Average variable Cost =
Wage / average product
Marginal Cost =
Wage / marginal product
Marginal Cost graph
J Shape
Marginal cost ? / ?
changeTC/changeQ = changeTVC/changeQ
Average Total cost minimum
Intersection of MC and ATC
average total cost graph
U shaped
increasing returns to scale(IRS)= Economies of scale and graph
More double output
Decreasing graph
constant returns to scale
Double output
LRAC horizontal
decreasing returns to scale(DRS)
Less double output
Increasing graph
Long run average cost curve
Long run total cost / Q
Optimal size of firm
Minimum of U shaped LRAC
stead state = rest point = fixed point
Long run equilibirum is a short run equlibirum
