Chapter 7 - Costs Flashcards
What are accounting costs?
The direct costs that come from operating a business.
What are opportunity costs?
What the consumer must give up when it uses an input, eg. what it could have done with it instead.
What are economic costs?
The combined opportunity and accounting costs.
Why should fixed costs not be taken into account when making production decisions?
They will occur regardless of what they are used for or even if they are used at all.
What are sunk costs?
Things which once they have been paid there is no way to recover any of their value eg. license fees.
What are operating revenue and costs?
What is earned by selling a product vs what it costs to make it. A business should only continue to operate if revenue > costs.
What is the equation for total costs?
TC = FC + VC
How are costs defined as either fixed or variable?
They are categorized depending on how easy it is for the firm to change the amount of input it is using.
Why are most costs fixed in the SR?
In a day/week it is very difficult to change the amount of labour or capital being used whereas in a longer period of time costs will gradually become variable.
What does a cost curve show?
The relationship between a firms production costs and its output over a specific period of time.
What are the 3 types of average cost?
- Average total cost
- Average variable cost
- Average fixed cost
What is average fixed cost?
It is simply fixed cost divided by output, as fixed costs remain the same higher quantities produced will cause it to decrease.
What is average variable cost?
It is the per unit cost of production divided by the quantity produced.
What is average total cost?
It is the average overall cost per unit, it is found by adding AVC and AFC at a given output level.
What is marginal cost?
Marginal cost is how much it will cost overall to produce an extra unit of output.
How is marginal cost calculated?
It is calculated by finding the change in total cost divided by the change in quantity.
What is marginal cost also equal to?
As fixed costs do not change it is also equal to the change in variable costs divided by the change in output.
What will the marginal cost curve look like?
For the first few units the curve may decline due to learning by doing however there after it will begin to increase due to reasons such as decreasing returns to scale, increased cost of materials, diminishing MRTSlk and capacity constraints
What costs are both derived from total cost and thus related?
Average cost and marginal cost.
What does it mean if marginal cost is less than average cost?
If marginal cost is less than average cost then the next unit produced unit will cost less than all the units which have been made before it and thus will decrease average cost overall.
What does it mean when the marginal cost curve is below average cost?
Costs must be falling and the curve will be downward sloping. This is even true when marginal costs are rising.
Why are the points where marginal costs and average cost are equal important?
At these points, there will be no change in average cost from producing an additional unit however after these points marginal costs will begin to increase average costs.
What does the SR expansion path look like?
It will be a horizontal line extending from the fixed level of capital.
What will the LR expansion path look like?
It will curve upwards with points lying on the optimal production bundles.
What are SR and LR total cost curves?
They are similar to Engel curves and will show how input changes with cost.
What are economies of scale?
If a proportional increase in the amount of output was to cause a less than proportional increase in costs then this would be economies of scale.
What are constant economies of scale/diseconomies of scale?
When a proportional increase of all inputs causes the same increase or a greater than proportional increase in costs.
What do economies of scale imply?
That the LR ATC falls as output increases and thus the curve will be downwards sloping as ATC = TC/Q.
What do diseconomies of scale imply?
That the ATC curve will be upward sloping.
What do constant economies of scale imply?
That the ATC curve is flat at that point.
What will an ATC curve typically look like?
It will be U shaped. At low output levels cost is rising more slowly than output causing it to fall, at the bottom of the curve TC is rising proportionally with output and thus MC = ATC, at higher output levels MC exceeds ATC causing TC to rise quicker.
What is the difference between economies of scale and returns to scale?
Returns to scale is a measure of how outputs change with a change in input whereas economies of scale is a measure of how costs change with an increase in output.
