Chapter 8 Flashcards
What is the total cost?
The amount a firm spends in order to produce the goods and services it producers.
Implicit Costs + Explicit Costs
What is accounting profit?
Profit calculated by subtracting the explicit costs from total revenue.
What is economic profit?
Profit calculated by subtracting both the explicit and implicit costs of business from total revenue. Economic profit is always less than account profit.
What are the three factors of production?
Labor, land and capital.
-the inputs used in producing goods and services.
What is the production function?
The relationship between inputs a firm uses and the output it creates.
-Used to keep costs down in the production process.
What is marginal product?
The change in output associated with one additional unit of an input.
-e.g. adding another cook in a restaurant will increase the number of meals made.
What is negative marginal product?
Occurs when the gains from specialization start to decline.
-e.g. if too many cooks are added, the wages paid will outweigh benefits of meals cooked.
What is diminishing marginal product?
Occurs when successive increases in inputs are associated with a slower rise in output.
What are variable costs?
Costs that change with the rate of output.
What are fixed costs?
Unavoidable - costs that do not vary with output in the short run.
What is average variable cost?
Costs determined by dividing total variable costs by the output.
What is average fixed cost?
Costs determined by dividing total fixed costs by the output.
What is marginal cost?
The increase in cost that occurs from producing additional output.
What is the efficient scale?
The output level that minimizes the average total cost.
What are economies of scale?
They occur when costs decline as output expands in the long run.