Chapter 8 Flashcards
Explicit costs
Monetary payments
ex) utility bills, wages, etc
Implicit costs
Value of next best use, self-owned resources, includes normal profit.
ex) things you cannot do because you opened that business.
Accounting profit
Accounting profit = revenue-explicit costs
Economic profit
Economic profit = accounting profit (revenue-explicit costs) - implicit costs
Total Product (TP)
Is the total quantity, or total output, of a particular good or service produced
Marginal Product (MP)
The extra output associated with adding a unit of variable input to the production process
Average Product (AP)
Aka labour productivity, is output per unit of labour input.
Law of Diminishing Product (returns)
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.
Total Cost (TC)
Sum of the fixed costs and variable costs at each level of output. TC= TFC+TVC
Marginal Cost (MC)
Extra, or additional, cost of producing one more unit of output.
Relation of MC to AVC and ATC
- when MC < current ATC… ATC will fall
- when MC > current ATC… ATC will rise
- MC intersects ATC and AVC at minimum points.
Variable cost (VC)
Those costs that change with the level of output. (Ex. Payments for materials, fuel, power, transportation services, most labour, and similar variable resources)
Fixed cost (FC)
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).
Average cost (AC)
AC = TC/Q
Average cost affects the supply curve.
Shifts of cost curve: price of a fixed input increases
- AFC and ATC shift up
- AVC and MC unchanged
Shifts of cost curve: price of variable input increases
- AVC, ATC, and MC shift up
- AFC unchanged
Shifts of cost curve: Technology
Improved technology, lower costs, cost curve shifts down, curve shifts depend on whether technology affects FC, VC, or both.
Short run
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
Long run
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
Long run cost curves
Always in the long run we pick the method which has the lowest cost.
Economies of scale
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
Constant returns to scale
The range of output between the points where economies of scale end and diseconomies of scale begin.
Diseconomies of scale
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
Minimum efficiency scale
Lowest level of output where long-run average costs are minimized
