Chapter 8 Flashcards
cost of firms
resources need to produce products are scarce and have alternative uses
Economic Cost
payment made to obtain and retain services of a resource
explicit costs
monetary payments used to purchase outside resources involves forgoing alternatives, paying from pocket
explicit costs examples
for inputs such as wages, utilities, materials
implicit costs
non expenditure costs (oppt cost of choice of running business)
implicit cost examples
forgone interest, wages, rent, entrepreneurial ability, income
Accounting Profit
Total Revenue - explicit cost
Economic Profit
accounting profit - implicit costs
normal profit (break even) is considered a cost because
amount required to ensure continued supply of product
positive and negative economic profit
+ doing better than in alternative venture
- doing worse than in alternative venture
Short run definition and variables
fixed plant, certain things changeable but not all. ex improve labour intensity but not add more plants
long run economic growth and example
variable plants, many things can change, can add more firms and increase labour intensity
total product
total output level per quantity
average output x quantity
marginal product
extra output associated with adding a unit of input
Average/labour product
output per unit or labour input
Tp/Quantity
Law of Diminishing Returns
all else fixed, increase in amount of workers will lead to smaller increase of production with diminishing returns
MP>AP
one more worker adds total product at an increasing rate AP rises
0 < MP < AP
one more worker increases Total product at a decreasing rate, AP falls
describe graph of Total Product
increases with increasing rate them increases with diminishing rate then reaches max and decreases
describe graph of Marginal Product
increases then decreases when diminishing returns occur
describe graph of AP
increases, somewhat constant then deceases
Fixed Costs
cost that do not change with output ex rent and insurance
variable costs
cost that change with output ex materials, power, fuel
Variable cost increase and decrease phenonmenoms with relation to marginal production and efficiency
increasing rate when mp decrease, decreasing rate when mp increase. TOTAL VARIABLE COSTS ALWAYS RISE!
what is Total Costs, what happens if output zero
sum of total fixed and total variable costs. Fixed cost when output is zero
Average Fixed Cost graph
decrease as output increases, TFC spreads more over units
Average Variable Costs graph
declines initially, reaches minimum then increases
Average Total Costs curve
declines initially, reaches minimum then increases
when do AVC and ATC increase think about MP
shortly after marginal production decreases
Marginal costs what does it allow
allows firms to determine whether it is possible to expand or contract production
marginal cost and marginal production relation for increase and decrease
as long as MP is increasing, marginal cost falls when MP at max, MC at min. Production inventory (output) / cost
relationship of MC to ATC (2) (graph)
relationship of MC with ATC and AVC
MC added to total costs is < current average ATC falls
MC added to total costs is > current average ATC rises
MC intersects AVC and ATC at minimum
Shifts of Curves Factor- Fixed input Increases
AFC and ATC shift up
AVC and MC unchanged
Shifts of Curves Factor - Variable Input increases
AVC, ATC, and MC shift up
AFC unchanged
Long Run Production Costs (output increasing) what do we produce more of. and what is reduced
create more plant sizes, ATC is reduced but eventually will rise when production inefficient
When do Firms change plant sizes when output is increasing
when ATC crosses with another ATC
Short Run ATC of Firms (2)
u-shaped (decreasing then increasing short runs)
various plant sizes available
LATC U-shaped and intersects
intersects at optimal choice or production of firm,
u-shaped because increase plant, decrease cost but eventually ATC costs will increase
Economies of Scale
When firm output increases LATC decreases, due to labour or managerial specialization efficient capital
Constant return to scale
As quantity of output increases, LATC is constant
Diseconomies of scale
As production output increases, LATC increase. Due to worker alienation, shirking, communication problems
Minimum Efficient Scale (MES)
output where long-run average costs are minimized
If period of LATC is relatively equal for economies, constant and diseconomies
Output is all sorts of firms, small or large because MES of ATC is same level as small or large output
If period of LATC is large of economies and very short for diseconomies
ATC Output of a large firm is less then ATC of short firm so there few large firms
If period of LATC is a sudden drop to MES then increase to during Diseconomies
Lots of small firms because ATC is less for small quantity then large/
