Chapter 8

Question 1

Explicit costs

Answer 1

Monetary payments

ex) utility bills, wages, etc

Question 2

Implicit costs

Answer 2

Value of next best use, self-owned resources, includes normal profit.
ex) things you cannot do because you opened that business.

Question 3

Accounting profit

Answer 3

Accounting profit = revenue-explicit costs

Question 4

Economic profit

Answer 4

Economic profit = accounting profit (revenue-explicit costs) - implicit costs

Question 5

Total Product (TP)

Answer 5

Is the total quantity, or total output, of a particular good or service produced

Question 6

Marginal Product (MP)

Answer 6

The extra output associated with adding a unit of variable input to the production process

Question 7

Average Product (AP)

Answer 7

Aka labour productivity, is output per unit of labour input.

Question 8

Law of Diminishing Product (returns)

Answer 8

Resources are of equal quality, the technology is fixed. Variable resources (ex. Labour) are added to fixed resources (ex. Capital or land). At some point, marginal product will fall.

Question 9

Total Cost (TC)

Answer 9

Sum of the fixed costs and variable costs at each level of output. TC= TFC+TVC

Question 10

Marginal Cost (MC)

Answer 10

Extra, or additional, cost of producing one more unit of output.

Question 11

Relation of MC to AVC and ATC

Answer 11

• when MC < current ATC… ATC will fall
• when MC > current ATC… ATC will rise
• MC intersects ATC and AVC at minimum points.

Question 12

Variable cost (VC)

Answer 12

Those costs that change with the level of output. (Ex. Payments for materials, fuel, power, transportation services, most labour, and similar variable resources)

Question 13

Fixed cost (FC)

Answer 13

Costs that do not vary with changes in output. Must be paid even if the output is zero. (Ex. Rental payments, interest on a firm’s debts, amd insurance premiums).

Question 14

Average cost (AC)

Answer 14

AC = TC/Q

Average cost affects the supply curve.

Question 15

Shifts of cost curve: price of a fixed input increases

Answer 15

• AFC and ATC shift up

- AVC and MC unchanged

Question 16

Shifts of cost curve: price of variable input increases

Answer 16

• AVC, ATC, and MC shift up

- AFC unchanged

Question 17

Shifts of cost curve: Technology

Answer 17

Improved technology, lower costs, cost curve shifts down, curve shifts depend on whether technology affects FC, VC, or both.

Question 18

Short run

Answer 18

Period too brief for a firm to alter its plant capacity, yet long enough to permit a change in the degree to which the plant’s current capacity is used. Firm can vary its output by applying larger or smaller amounts of labour, materials, and other inputs to that plant, using its existing plant capacity more or less intensively in the short run. FIXED PLANT PERIOD

Question 19

Long run

Answer 19

Period long enough for a firm to adjust the quantities of all the factors that it employs, including plant capacity. Includes enough time for existing firms to dissolve and leave the industry or for new firms to be created and enter the industry. VARIABLE PLANT PERIOD

Question 20

Long run cost curves

Answer 20

Always in the long run we pick the method which has the lowest cost.

Question 21

Economies of scale

Answer 21

Relations in the average total cost of producing a product as the firm increases plant size (output) in the long run. (You become more efficient as you expand)
Ex. Labour specialization, managerial specialization, efficient capital

Question 22

Constant returns to scale

Answer 22

The range of output between the points where economies of scale end and diseconomies of scale begin.

Question 23

Diseconomies of scale

Answer 23

Increases in the average total cost of producing a product as the firm increases plant size (output) in the long run. (Getting harder and harder to run a large business)
Ex. Control and coordination problems, communication problems, worker alienation, shirking

Question 24

Minimum efficiency scale

Answer 24

Lowest level of output where long-run average costs are minimized