Chapter 7: Analysis of Costs Flashcards
Marginal Cost:
Marginal Cost denotes the extra or additional cost of producing 1 extra unit of output.
The cost curve is determined by what?
The costs curve are determined by (1) factor prices and (2) the firm’s production function.
Labor, land and materials are in which type of costs in the short run? And what type in the long run?
In the short run, labor and materials costs are typically variable costs, while capital costs are fixed. In the long run, all inputs (labor, materials, and capital) can be adjusted, all costs are variable.
Least-Cost Rule:
to produce a given level of output at least cost, a firm should buy inputs until it has equalized the marginal product per dollar spent on each input. The goal is to maximize profits
Substitution Rule:
if the price of one factor falls while all other factor prices remain the same, firms will profit by substituting the now-cheaper factor for the other factors until the marginal products per dollar are equal for all inputs.
What does the income statement show?
The income statement shows the flow of sales, cost, and revenue over the year or accounting period.
Net Income (or profit) =
Total revenues - total expenses
Total revenue =
Net sales
Total expenses =
Cost of different inputs (operating expenses: labor cost, rent, selling and administrative costs (e.g. costs of advertising the product and running the back office), miscellaneous operating costs (e.g. cost of electricity), depreciation (measures the annual cost of a capital input that a company actually owns itself)
The balance sheet:
The balance sheet indicates an instantaneous financial picture or snapshot. The major items are assets, liabilities, and net worth.
Net worth = Assets - Liabilities
Why do decisions have an opportunity cost?
Decisions have opportunity costs because choosing one thing in a world of scarcity means giving up something else. The opportunity cost is the value of the most valuable good or service forgone.
Production function:
shows the maximum amount of output that can be produced with various combinations of inputs.
Law of Diminishing Marginal Product:
The Law of Diminishing Marginal Product states that as we increase one input and hold other inputs constant, the marginal product of the varying input will, at least after some point, decline.
Equal-Product Curve or Isoquant:
All the points on the equal-product curve represent the different combinations of land and labor that can be used to produce a given desired amount of units of output.
Equal-Cost Line:
Every point on a given equal-cost line represents the same total cost. The lines are straight because factor prices are constant, and they all have negative slope equal to the ratio of labor price to land price, and hence are parallel.
